- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 42. Fixed-Income Securities: Defining Elements
- Subject 5. Bonds with Contingency Provisions
CFA Practice Question
The embedded options that are granted to the issuer of a bond MAY include ______.
II. the right of the underlying borrowers in a pool of loan to repay an amount in excess of the scheduled principal repayment
III. the accelerated sinking fund provision
IV. the cap on a floater
I. the right to call the issue
II. the right of the underlying borrowers in a pool of loan to repay an amount in excess of the scheduled principal repayment
III. the accelerated sinking fund provision
IV. the cap on a floater
A. I, II and III
B. I, III and IV
C. I, II, III and IV
Explanation: I is a simple embedded option. III and IV are complex ones.
User Contributed Comments 9
| User | Comment |
|---|---|
| mtcfa | Is a cap on a floater actually considered an option. I would think it is just more a feautre. |
| sarath | Yes of course... |
| linr0002 | the right of a borrower to prepayments is not an option granted to the issuer since the issuer does not have the ask borrowers to repay more. |
| h1bvisa | what is an issuer? the issuer is the borrower, not NOT the underlying borrower(s). the option cannot be granted to the underlying borrowers. |
| dream007 | hmmm...great question! |
| ramdabom | think of mortgage prepayment as an example of II. |
| DonCap | Key phrase: Excess principal payment. My car payment is 220, where 50 of that is interest so principal paid back is 170. I decide to make a payment next month of 250, which is an excess principle payment of 30 (200-170). |
| MattNYC | I was tricked by the issuer/borrower dilemma as well. Good question. Recall for the exam that the issuer is the borrower for the entire pool, but there are individual borrowers that borrow from the issuer. |
| hvanwyk | I think some of the answer also has to do with the fact that the question states "MAY". It may very well include anything, but will it? |