CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
An issuer sells a five-year bond with a coupon of 3% in years 1 and 2, 4% in years 3 and 4, and 5% in year 5, all set at issuance. Compared with a fixed-rate bond, this bond's coupon structure is best described as:
The bond is a step-up coupon bond. Its coupon increases on a predetermined schedule set at issuance, rising from 3% to 4% to 5%. It is not floating because the rates do not depend on a market reference rate, and it is not deferred because interest is paid from the start.
- Aa floating-rate note with a periodic reset
- Ba step-up coupon bond with a predetermined scheduleCorrect
- Ca deferred coupon bond with no early payments
Explanation
The coupon rises on dates and by amounts fixed at issuance, which defines a step-up coupon bond. It is not floating because the rates do not depend on a reference rate. It is not deferred because coupons are paid from year 1.
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