CFA Practice Question

CFA Practice Question

Mercer Industries, a large industrial firm, recently announced a new debt issue with a five-year maturity. The 5-year debt instruments will be issued with a 7.5% annual coupon rate for the first four years, and this annual coupon rate will increase to 9.0% in the fifth year. These debt instruments were issued at their $17,500 par value. Which of the following best characterizes this debt issue? Choose the best answer.
A. Single step-up bond.
B. Jumbo step-up note.
C. Single step-up note.
Explanation: The debt instrument profiled in this example is best characterized as a "single step-up note." Step-up notes are intermediate-term debt instruments whose coupon rate is increased once prior to maturity. Had this debt instrument been of longer maturity, for instance 16 years, then "single step-up bond" would have been the most correct answer. A "ratchet bond" is a debt instrument whose coupon rate is periodically adjusted at a fixed margin over an explicit reference rate, such as LIBOR or the broker loan call rate. A "jumbo step-up note" is largely a fictitious term. Finally, remember that debt instruments can be issued with any par value, and this is why the prices of debt instruments are quoted as a percentage of par rather than an explicit dollar value.

User Contributed Comments 4

User Comment
frcfa unanswerable with the notes:
1 to 5 years: short-term notes
5 to 12 years: intermediate bond
5 years: note or bond?
afeldman notes are 2-10yrs in maturity.
bonds are 10yrs+
iambroke there are bills notes and bonds
Andy552 Treasury Bills very short duration
Notes intermediate duration
Bonds long duration
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