CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
An issuer has 200 million of 10-year bonds with a sinking fund requiring it to retire 20 million at par at the end of each year from year 6 through year 10 (100 million in total), with the remaining 100 million repaid at maturity. The bond's balloon payment at maturity is closest to:
The balloon payment is about 100 million. The sinking fund retires 20 million a year for five years, or 100 million in total, leaving half of the 200 million issue outstanding to be repaid as a lump sum at maturity.
- A20 million
- B100 millionCorrect
- C180 million
Explanation
Five sinking fund payments of 20 million total 100 million, leaving 200 - 100 = 100 million outstanding as the balloon. The year-10 sinking payment is part of the 100 million, so the balloon is the remaining 100 million. 20 million is a single installment; 180 million subtracts only one installment.
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