Reading 65: Introduction to the Valuation of Debt Securities- 2011, difficult, expected, problems, center

1215

Session 16: Fixed Income: Analysis and Valuation
Reading 65: Introduction to the Valuation of Debt Securities

LOS b: Identify the types of bonds for which estimating the expected cash flows is difficult, and explain the problems encountered when estimating the cash flows for these bonds.

 

 

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.

---

 

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.

1215

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

A) Sinking fund provisions.

B) Conversion privilege.

C) Fixed coupon rate.

---

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.

1215

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

A) Exchange privilege.

B) Fixed coupon rate.

C) Noncallable bond.

---

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.