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Basic Question 1 of 14

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:

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.
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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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I used your notes and passed ... highly recommended!
Lauren

Lauren

Learning Outcome Statements

calculate and interpret effective duration of a callable or putable bond;

compare effective durations of callable, putable, and straight bonds;

describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options;

CFA® 2025 Level II Curriculum, Volume 4, Module 28.