CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the process of valuing a bond?

I. The value of a bond is the present value of its maturity payment.
II. For bonds of equal risk and total annual coupon payments, the bond with the greater frequency of coupon payments during the year will be worth more.
III. Estimated cash flows on callable bonds are more certain than the estimated cash flows on straight bonds.
IV. From a bond pricing point of view, there is no distinction made between a bond's coupon payments and its maturity payment.
A. I, II and IV
B. II, III and IV
C. II and IV
Explanation: I is incorrect because the value of a bond is the present value of all its future payments, which includes its coupons and its maturity payment.

II is correct because the more frequent the coupon payments, the sooner they may be reinvested to earn interest.

III is incorrect because estimated cash flows on callable bonds are much less certain than the estimated cash flows on straight bonds. Callable bonds may never make it to maturity if the issuer decides to call the bond; therefore, the future cash flows are very uncertain.

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