Reading 60: Features of Debt Securities - LOS e～ Q1-2 security, name, benefits, following, whether

yangh

 

LOS e: Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or the bondholder.

Q1. Which of the following embedded options most likely benefits the bondholder?

A)   Prepayment option on an amortizing security.

B)   Put provision at par on a bond that is trading at a premium.

C)   Interest rate cap on a floating-rate bond.

 

Q2. Which of the following embedded options benefits the bond investor?

A)   Call provision.

B)   Prepayment option.

C)   Put provision.

 

yangh

 

LOS e: Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or the bondholder.fficeffice" />

Q1. Which of the following embedded options most likely benefits the bondholder?

A)   Prepayment option on an amortizing security.

B)   Put provision at par on a bond that is trading at a premium.

C)   Interest rate cap on a floating-rate bond.

Correct answer is B)

A put provision is an option that is exercisable by, and therefore potentially of benefit to, the bondholder. Even though the put is out of the money, it still has value to the bondholder. Interest rate caps and prepayment options both potentially benefit the issuer of the bond.

 

Q2. Which of the following embedded options benefits the bond investor?

A)   Call provision.

B)   Prepayment option.

C)   Put provision.

Correct answer is C)

A put provision allows the investor to put the bond back to the issuer.

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connie198226

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mcdullpong

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sandrablue

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dullmul

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saint_zhu

embedded options

wangyoucao

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hjl2000

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