CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers
A corporation issues a 10-year bond with a sinking fund requiring it to retire 10% of the original principal each year starting in Year 1, either by calling bonds at par or buying them in the open market. Bonds are currently trading at 96% of par. Which action is the issuer most likely to take for the Year 1 requirement, and why?
The issuer will most likely buy bonds in the open market. With bonds trading at 96% of par, repurchasing retires the required face value at a lower cost than calling at par. The sinking fund obligation starts in Year 1, so deferral is not allowed.
- ACall bonds at par, because call price is fixed and certain
- BBuy bonds in the market, because the price is below parCorrect
- CDefer the retirement, because the requirement applies only at maturity
Explanation
When the market price is below the par call price, repurchasing in the open market costs the issuer less to retire the same face value. Calling at par would cost 4% of face more. Deferral is wrong because the sinking fund requires annual retirement beginning in Year 1.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Markets for Corporate Issuers shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Markets for Corporate Issuers questions
- Relative to investment-grade corporate bonds, high-yield corporate bonds are most likely to:
- A corporate issuer sells a bond directly to a small group of institutional investors without registering it with the securities regulator. W…
- Compared with a bond issued in the public market, a syndicated loan arranged for a corporate borrower is most likely to:
- A corporate treasurer wants short-term funding that is unsecured, issued at a discount to face value, and sold in the market without a forma…
- A corporation has registered a large amount of debt with the securities regulator and plans to sell portions of it over the next two years a…
- Compared with a bank loan, issuing commercial paper is most likely to give a highly rated corporation: