Question

An investor is considering three 6%, five‐year bonds for investment. The cash flows for each bond are given below.
Bond A: Investors receive the annual coupon payment of $60 and the principal amount of $1,000 at maturity.

Bond B: Investors receive a constant annual payment for five years.
Bond C: Investors receive a constant annual payment and a balloon payment in Year 5.
Assuming there are no other cash flows for these bonds, which of the following is the most likely classification of Bond B?

Bullet bond

Fully amortized bond

A step-up coupon bond.

Partially amortized bond

None of the other answers are correct.

Answer 1

correct answer is option = Fully amortized bond

Fully amortized bond is the bond in which periodic payment is made on debt at constant amount in such a way that no maturity amount payment is required at the end of the period. In partially amorization some principal amount is paid at the end of the perod. Step up coupon will require increase in coupon amount each period. In our case bond B is fully amortized bond as the constant annual payment will be made over the 5 year duration.