Reading 67: Introduction to the Valuation of Fixed Income create, black, class, following, difficulty

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1.Which of the following characteristics would create the most difficulty in estimating a bond's cash flows?

A)   Fixed coupon rate.

B)   High credit quality bond.

C)   Exchange privilege.

D)   Noncallable bond.

2.Which of the following characteristics would create the least difficulty in estimating a bond’s cash flows?

A)   Sinking fund provisions.

B)   Callable bond.

C)   Conversion privilege.

D)   Fixed coupon rate.

3.Which of the following characteristics would create the least difficulty in estimating a bond’s cash flows?

A)   Variable coupon rate.

B)   Putable bond.

C)   Noncallable bond.

D)   Exchange privilege.

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答案和详解如下：

1.Which of the following characteristics would create the most difficulty in estimating a bond's cash flows?

A)   Fixed coupon rate.

B)   High credit quality bond.

C)   Exchange privilege.

D)   Noncallable bond.

The correct answer was C)

Normally, estimating the cash flow stream is straightforward for a high quality, option-free bond due to the high degree of certainty in the timing and amount of the payments. The following four conditions could lead to difficulty in forecasting the bond’s future cash flow stream: (1) increased credit risk, (2) the presence of embedded options (i.e., call/put features or sinking fund provisions), (3) the use of variable rather than fixed coupon rate, and (4) the presence of a conversion or exchange privilege.

2.Which of the following characteristics would create the least difficulty in estimating a bond’s cash flows?

A)   Sinking fund provisions.

B)   Callable bond.

C)   Conversion privilege.

D)   Fixed coupon rate.

The correct answer was D)

Normally, estimating the cash flow stream is straightforward for a high quality, option-free bond due to the high degree of certainty in the timing and amount of the payments. The following four conditions could lead to difficulty in forecasting the bond’s future cash flow stream: (1) increased credit risk, (2) the presence of embedded options (i.e., call/put features or sinking fund provisions), (3) the use of variable rather than fixed coupon rate, and (4) the presence of a conversion or exchange privilege.

3.Which of the following characteristics would create the least difficulty in estimating a bond’s cash flows?

A)   Variable coupon rate.

B)   Putable bond.

C)   Noncallable bond.

D)   Exchange privilege.

The correct answer was C)

Normally, estimating the cash flow stream is straightforward for a high quality, option-free bond due to the high degree of certainty in the timing and amount of the payments. The following four conditions could lead to difficulty in forecasting the bond’s future cash flow stream: (1) increased credit risk, (2) the presence of embedded options (i.e., call/put features or sinking fund provisions), (3) the use of variable rather than fixed coupon rate, and (4) the presence of a conversion or exchange privilege.