FRM II-MR 17

anbu.edu
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FRM II-MR 17

Postby anbu.edu » Mon Sep 08, 2014 6:28 am

Principal-only strips are:
A) sold at par.
B) sold at a considerable discount to par.
C) sold at a considerable premium to par.
D) could be sold at a discount or a premium, depending on economic conditions.
Your answer: The correct answer was B) sold at a considerable discount to par

Is this answer correct, if so is there any explanations

edupristine
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FRM II-MR 17

Postby edupristine » Fri Sep 12, 2014 11:11 am

Ans B is correct because every 0 coupon bond should be sold at discount because they will not get any coupon or any amount till maturity. Here in case of PO investors will only get face value nothing else.
For example:- Principal only with face value= $100, I/Y= 10%, Coupon= 0, PV=?
It should be less than $100 because of discounting factor.

Hope this helps


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