CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
Compared with an otherwise identical bullet bond, a fully amortizing bond with the same coupon rate and maturity most likely has:
The fully amortizing bond most likely has lower credit risk. Principal is returned gradually, so the outstanding balance exposed to default declines over time, unlike a bullet bond where the entire principal remains at risk until maturity.
- Alower credit risk from the repayment of principal over timeCorrect
- Bhigher reinvestment-free cash flow at maturity
- Ca larger final payment at maturity
Explanation
Because principal is repaid gradually, the outstanding balance and the investor's exposure to default fall over time, which lowers credit risk versus a bullet bond. The final payment of a fully amortizing bond is small, not larger. Amortizing payments must be reinvested earlier, so reinvestment-free cash flow at maturity is not higher.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Instrument Features shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Instrument Features questions
- In many jurisdictions, interest on bonds issued by municipal or local governments is exempt from income tax. All else equal, the yield on su…
- A corporate bond is convertible into the issuer's common shares at a conversion price of $25 per share. The bond has a par value of $1,000 a…
- An investor holds a putable bond. The put feature is most likely to be exercised when:
- An investor holds a bond whose indenture includes a covenant restricting the issuer from taking on additional debt above a stated leverage r…
- A bond's legal contract between the issuer and the bondholders, which sets out the issuer's obligations and the bondholders' rights, is best…
- A 3-year bond with a face value of 1,000 pays a 4% annual coupon and is priced at 1,000 (par). A second bond is a 3-year zero-coupon bond wi…