CFA Practice Question

CFA Practice Question

A debt security that has a coupon rate of 5% for two years, then a coupon rate of 5.5% for two years, and finally a coupon rate of 6% for one year (at which time the security matures) is known as which of the following?
A. Inverse floater
B. Step-up note
C. Ratchet bond
Explanation: Step-up notes have coupon rates that increase, or step up, over time. In this example the coupon steps up more than once, and thus is called a multiple step-up note. Ratchet bonds have a coupon rate that adjusts periodically at a fixed margin over a reference rate but can only adjust downward. Inverse floaters have coupon rates that move in the opposite direction from the change in the reference rate.

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