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Basic Question 0 of 7
An analyst is examining the impact of a decline in the level of market rates on the realized return from a callable bond. The analyst is considering the impact of a one-time decline of 100 basis points on the bond's required return. The bond issuer is expected to call the bond in this scenario. The bond is callable on the first coupon payment five years prior to the maturity date. Select the best answer:
B. The realized return computation will include a final cash flow equal to the conversion price.
C. The realized return computation will include a final cash flow equal to the call price.
A. The realized return computation will include a final cash flow equal to par value.
B. The realized return computation will include a final cash flow equal to the conversion price.
C. The realized return computation will include a final cash flow equal to the call price.
User Contributed Comments 4
| User | Comment |
|---|---|
| surob | Didn't understand. Can someone help? |
| jerylewis | The last payment received by bondholder in this case is the call price, not the par value of the bond. If issuer exercises the call option, the holder will receive the call price as LAST cash inflow |
| chamad | Assumption:decline in the level market rates. An issuer is more likely to call the bond...so the last inflow will be the callable price |
| 2014 | u cannot assume that it would be called at par value unless stated in this question. If u had sinking fund in this question as additional information then call price is par value |
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Learning Outcome Statements
explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company's common shares;
describe terminal value and explain alternative approaches to determining the terminal value in a DDM;
calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM;
explain the use of spreadsheet modeling to forecast dividends and to value common shares;
evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
CFA® 2025 Level II Curriculum, Volume 3, Module 21.