CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
An investor holds a bond that pays a coupon of 4.0% in the first two years, 5.0% in the next two years and 6.0% in the final two years of its life. This bond is best described as a:
The bond is a step-up coupon bond. Its coupon rises on scheduled dates by amounts set in advance, from 4% to 5% to 6%. A floating-rate note would reset to a reference rate, and a zero-coupon bond would pay no periodic interest at all.
- Astep-up coupon bondCorrect
- Bzero-coupon bond
- Cfloating-rate note
Explanation
A step-up coupon bond has a coupon that rises on predetermined dates by predetermined amounts. The rates here are fixed in advance, so it is not a floating-rate note, which resets to a reference rate. It is also not a zero-coupon bond, which pays no periodic coupons.
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