CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following bonds is likely to command the HIGHEST yield, assuming they are all issued by the same entity and have the same maturity?
A. Sinking fund bonds
B. Amortizing bonds
C. Callable bonds
Explanation: All bonds have reinvestment risk to different degrees. Callable bonds will have the highest yield because of the call option written by the investors, so that the issuer can call the bond before its maturity at a price less than the intrinsic value of the bond if interest rates fall.

User Contributed Comments 4

User Comment
CoffeeGirl because the holders must undertake the risk of bonds may be called back before the maturity, thus, higher yield is necessary.
Billu Even in amortized we may have prepayment ?
thegodfather Their explanation for why only the callable bonds answer is right ("the issuer can call the bond before its maturity at a price less than the intrinsic value of bond"), isn't this valid for sinking fund bonds too?
StanleyMo in an amortizing bond, the principal of each bond is repaid (amortized) over the life of the bond;
in a sinking fund, some bonds are repurchased or called, effectively being repaid in full prior to maturity.
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