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Basic Question 5 of 18
A three-year, annual-pay, 5% coupon bond with par value $1,000 currently sells for $975. A three-year, annual-pay, step-up bond with scheduled coupon rates of 5%, 5.5% and 6% is also available from the same bond issuer.
B. The price of $1,000 par value of the step-up bond is less than $975.
C. The price of $1,000 par value of the step-up bond is equal to $975.
A. The price of $1,000 par value of the step-up bond is greater than $975.
B. The price of $1,000 par value of the step-up bond is less than $975.
C. The price of $1,000 par value of the step-up bond is equal to $975.
User Contributed Comments 13
| User | Comment |
|---|---|
| mtcfa | This assumes that both bonds are of identical risk. |
| Eglovismenos | They are issued by the same issuer, so it is a fact that both bonds have the same risk and not an assumption |
| shawnryu | what if step up bond is so risk bond as CMO, CDO and so on despite the same issuer. |
| nike | If not given you should assume the risk is the same. Don't think too much. |
| fedha | good point nike |
| antihead | 50 * 1,0593 ^-1 + 55 * 1,0593 ^ -2 + 60 * 1,0593 ^-3 + 1000 * 1,0593 ^-3 = 987, 95 (rounded). |
| hyperinflation | oh my gosh people... STOP OVER-ANALYZING. |
| gulfa99 | there is no need for caculation. bonds are normally issued at par and the question is not referring to zero coupon bond. so 1000 is greater than 975 simple. |
| johntan1979 | Yet another wrong assumption from gulfa99. The price of the step up bond is greater because of the higher promised cash flows. If the 3 rates had been anything less than 5%, then it won't be greater. |
| gill15 | I wonder if Gulfa passed. Maybe he'll use his assumptions and luckily be right and breeze through the exams. |
| CJPerugini | Step up bonds are often times callable by the firm, making them more risky than a traditional bond. Increased risk = decreased bond price |
| Inaganti6 | Comments are dangerous. Way too many people pontificating without enough basis the confidence and adamance is almost arrogant . |
| sshetty2 | Bonds with coupon payments, in general, bear less interest rate risk and therefore are sold with a lower risk premium |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
describe common cash flow structures of fixed-income instruments
CFA® 2024 Level I Curriculum, Volume 4, Module 2.