CFA Practice Question

CFA Practice Question

A company is planning to issue 15-year bonds. It expects significant cash flows from investment of the bond proceeds in a project at intervals of five years. It may consider issuing ______.
A. amortizing bonds
B. callable bonds
C. serial bonds
Explanation: Serial bonds pay back principal at intervals. They are equivalent to a series of bullet maturity bonds. Each serial bond may have a different coupon. Given that the issuer expects cash flows from the project at 5-year intervals, serial bonds would match up with the company's projected cash flow.

User Contributed Comments 8

User Comment
malawyer I don't think that serial bonds would be too good of an idea, since projekt cash flow may vary from projections, sometimes heavily. In order to be flexible, a callable bond may be more suitable. But so much for theory/practice when studying...
copus what is the difference between a series bond and an amortizing bond??? An amortizing bond that amortizes every 5 years could also work.
jpducros Good question Copus...anyone ?
JCopeland An amortizing bond would amortize much like a mortgage over the course of 5 years. A serial bond has a bullet maturity at given intervals. A cash flow that occurs every 5 years would not be best for amortizing bond. Serial is much better. However, I do agree w/ malawyer that callable would be much better unless future cash flows are certain.
Bretton I feel that a callable bond is best in this scenario. While it may be a bit more expensive from a capital raising perspective; this gives them the ability to pay off in intervals but not wholly depend on their projects projections.
CalebMast Not for sure on this answer, but it seems that the designation (and exam) prefers guaranteed returns, and stability from serial bonds may be the goal, versus the potential volatility from callable bonds.
bmueller82 I also chose Answer B as cash flows from Projects are never 100% certain. The reason why answer C is "more" correct could be the higher interest the company can charge on serial bonds compared to callable bonds.
ctschro imho, it is debatable whether serial or callable could be more beneficial here, given the limited information provided in the stem.
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