- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 46. Understanding Fixed-Income Risk and Return
- Subject 2. Macaulay, Modified and Effective Durations
CFA Practice Question
When yields are above the coupon rate, the price of a callable bond is dependent on ______ and when yields are below the coupon rate the price is dependent on ______.
A. the present value of future cash flows to maturity; the call price
B. the present value of future cash flows to maturity; the term to maturity
C. the call price; the present value of future cash flows to maturity
User Contributed Comments 8
| User | Comment |
|---|---|
| Pooh | When yield < coupon rate, it is to issuer's advantage due to cheaper market rate, issuer to call the bond. Therefore, the price is dependant upon the CALL PRICE. |
| jpducros | Pooh, I'm not sure you're answer is supporting answer A. Do we have to consider we are on the investor's side rather than on the issuer's side ? |
| jpducros | ok, forget my comment, you're right |
| RAustin | Pooh to your point, the issuer pays the same coupon amount regardless of the current market yield, so if there is an inverse relationship between price and yield, wouldn't a bond with a higher market yield (lower price) be more in danger of being called? This would support answer C. |
| RAustin | Nevermind my comment, ha ha. With all the studying I don't know my ass from my elbow anymore. |
| siggarusfigs | Ok but couldn't it be possible for the call price be lower than the coupon? |
| sikwingo | I am in deep trouble, you guys just messed me up |
| MinaYu | I agree with Pooh. I think we need to think in the issuer's shoes.. |