- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 42. Fixed-Income Securities: Defining Elements
- Subject 5. Bonds with Contingency Provisions
CFA Practice Question
There are 490 practice questions for this study session.
CFA Practice Question
A five-year, semi-annual pay, 7 1/2% coupon bond is priced at par. The bond is callable beginning with the first coupon payment date three years from the present date. In the absence of default by the bond issuer ______
A. holders of this bond may receive as many as 10 cash flows or as few as six.
B. holders of this bond may receive coupon interest as high as 5% per annum or as low as 2.5% per annum.
C. holders of this bond may receive coupon interest as high as 7 1/2% per annum or as low as 3.75% per annum.
Explanation: There are two coupon payments per year for a semi-annual pay bond. The bond can be called on the first payment of the third year, payment number five.
User Contributed Comments 9
|geet||If the first coupon payment date is 3 years from now the first 6 coupons payments are not considered. Since there is only 2 years left I figure the most you can receive is 4 payments. Dont understand this. Somebody explain...|
|phill||it's 6. You did not count the first one.|
|guna||easy convention to remember is any where you see, "from today", take t-1.|
|gazza77||What about the principle repayment upon call of the issue? That makes 6 payments|
I agree. And that would actually make it min 6 and max 11...
|bloomt||What is wrong with C?|
|nostalgia||geet, i think you misunderstood the question, though i believe its a problem with the wording of the question more than anything else.
when they say 'first coupon payment', they actually mean 'first coupon payment of the 3rd year'.
having said that, the answer's explanation seems to contradict the answer by saying that the bond can be called back on payment number 5 - this would mean that the min number of cashflows is 5, unless they consider the principal repayment an additional cashflow.
|nostalgia||bloomt, the coupon interest is always 7-1/2% per annum, regardless of whether it is called back halfway during the year.|
|gill15||I understand where Geet is coming from.
I thought the first coupon date began at year 3 as well.