The Coupon Cannot Move

Rule 19 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

Rates rise and prices fall. The coupon itself cannot move. The market reprices it until the return matches. NOT a change in what the issuer pays.

The trick

Common trap: Rates rose, so the coupon rises too. Correct: The coupon is fixed. The price does the moving. Cross out any choice that changes the coupon.

The method for this kind of question

Yield is tested in two sections

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

A bond's indenture includes a sinking-fund provision. What does that provision require the issuer to do, and what is the effect on default risk?

A. Retire a set portion of the issue each year, which lowers default risk through orderly retirement before maturity B. Retire the entire issue at once on the maturity date only, with no effect on default risk C. Repurchase common shares each year, which lowers default risk D. Post additional collateral every year, with no retirement of debt at all

How sure are you?

Sure Fairly sure Guessing

Correct: A. A sinking-fund provision requires the issuer to retire a set portion each year, lowering default risk through the orderly retirement of the issue before maturity.

B. A sinking fund retires the issue gradually over time, not entirely at maturity in one step.

C. A sinking fund retires the issuer's own bonds, not its common shares.

D. A sinking fund retires debt directly; it is not a collateral-posting mechanism.

Unit: SIE outline 2.1.2

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