CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
Compared with a bullet bond of the same maturity and coupon rate, a fully amortizing bond most likely has:
A fully amortizing bond most likely has lower credit exposure over its life because the outstanding principal declines with each payment, whereas a bullet bond keeps the full principal at risk until maturity. Its earlier principal receipts, however, raise reinvestment risk.
- Ahigher credit risk near maturity
- Blower reinvestment risk on principal
- Clower credit exposure over its lifeCorrect
Explanation
Amortizing bonds repay principal over time, so the outstanding balance and credit exposure fall; the bullet bond bears full exposure until maturity. Option A is reversed because the amortizing balance is near zero at maturity. Option B is wrong since early principal repayments increase reinvestment risk.
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