Premium bonds highest coupons? from sample test

following, therefore, payments, only, understand

"Holding maturity and yield constant, amortizing bonds selling at a premium would have the highest coupon payments and the highest amount requiring reinvestment; therefore, they have the highest level of reinvestment risk. In the case of par value amortizing bonds, only coupons must be reinvested."

I understand why high coupons are riskier from reinvestment perspective. But I thought that coupons are paid as stated and premium is a yeild related term.... I'm not quite following the description from CFA sample test question

koba

CFA Candidates

Rank: 2

UID: 223280
帖子: 242
主题: 99
注册时间: 2011-7-11
最后登录: 2013-8-23

2^#

发表于 2011-7-13 17:14 | 只看该作者

Yes ov25, you are totally right on understanding Premium as being a yield related term.

But here, it is saying there are 2 bonds with same Maturity and Yield. One is selling at a Premium and another is selling at Par. Which one would be paying a higher coupon?

The one selling at Premium would surely have in it a higher premium, cause other things (Yield and Maturity are same for both). Correct?

Now, higher the coupon, higher would be the re-investment risk. You have already got this part.

TOP

ramdabom

CFA Candidates

Rank: 2

UID: 223283
帖子: 283
主题: 130
注册时间: 2011-7-11
最后登录: 2013-8-19

3^#

发表于 2011-7-13 17:14 | 只看该作者

Higher coupon means more to invest each period , so if rates go down , you could have greater risk of loss . Low coupon means you got a bigger discount already ( equate to profits) , so less to invest each period , so if rates go down , you have less risk of loss ( most profits made up front )

TOP

返回列表

Premium bonds highest coupons? from sample test

[收藏此主题] [关注此主题的新回复]

[通过 QQ、MSN 分享给朋友]