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CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features

An investor holds a bond that the issuer may redeem at par before the scheduled maturity date, and the bond also repays principal through a sinking fund. Relative to a bond with only a bullet maturity, the investor's effective maturity is most likely:

The effective maturity is most likely shorter. Sinking fund payments and early redemption return principal before the stated maturity date, so the weighted-average time to receipt of principal is less than the contractual term of a bullet bond.

  1. Alonger, because the sinking fund extends the final maturity date
  2. Bshorter, because principal is repaid before the stated maturityCorrect
  3. Cthe same, because the stated maturity governs all cash flows

Explanation

Sinking fund payments and early redemption return principal before the stated maturity, so the average life and effective maturity are shorter than the stated maturity. The stated maturity date does not govern timing of these earlier cash flows.

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