CFA Practice Question

There are 266 practice questions for this study session.

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..
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