CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
Two bonds from the same issuer have identical coupon rates and credit quality. Bond X is a bullet bond maturing in 10 years. Bond Y is a fully amortizing bond with a 10-year final maturity. Compared with Bond X, Bond Y most likely has:
Bond Y most likely has a shorter weighted average life. Because it repays principal gradually through the amortization schedule, the average time to receive principal is earlier than for the bullet bond, which repays all principal only at the 10-year maturity.
- Aa longer weighted average life
- Ba shorter weighted average lifeCorrect
- Cthe same weighted average life because maturities are equal
Explanation
A fully amortizing bond returns principal gradually through scheduled payments, so on average principal is repaid earlier than a bullet bond, which repays everything at maturity. Hence Bond Y has a shorter weighted average life and lower reinvestment and credit exposure to final principal. Equal maturity does not imply equal average life.
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