CFA Practice Question

CFA Practice Question

Which of the following embedded options do not offer an advantage to bondholders?

I. Conversion privileges.
II. Embedded call options.
III. Prepayment provisions.
IV. Floor on a floater.
V. Embedded put options.
A. II and III.
B. I and II.
C. III and IV.
Explanation: Embedded call options allow issuers of debt to "call" away their outstanding debt, or redeem debt prior to maturity and at a specified price. Prepayment provisions allow issuers of debt to prepay their existing obligations, reducing overall credit risk. The "floor" is a restriction placed on a variable-rate debt instrument which limits how low the coupon rate can fall, and embedded put options allow bondholders to demand redemption from issuers at a specified price and prior to maturity. The conversion privilege allows bondholders the right to convert their bonds into another security, typically the equity of the issuer.

User Contributed Comments 2

User Comment
arudkov isnt I not advantage?
dipu617 I is an advantage to the bondholders. That's why its wrong....
You need to log in first to add your comment.