Question: Relative to a fully amortized bond, the coupon payments of an otherwise similar partially amortized bond are:
A. lower or equal
B. equal
C. higher or equal
Answer : C
I went for A as partially amotized bond have (higher) principal payment at maturity, so it doesn’t have to pay as much as fully amortized bond. But obviously i’m wrong as the right answer is C. Anyone could tell me what did I miss ?
Many thanks !!!
Coupon payments are just the interest payments. So while a partially-amortized bond or loan may have lower initial “principal and interest” combined payments, before the final balloon payment hits, the coupon part of payments (just interest) can be higher given the higher risk the bond overall.
Nobody ever can be too sure the final balloon payment will be paid (or can be refinanced) at the end. In this way the bonds have higher potential risk attached to them and therefore can be expected to offer slightly higher returns to investors/creditors on the other side of the bond/loan.
Thanks Greybeard !! I agree with you if we follow your logic “coupon payment = interest payment”.
I was not sure about that cause usually coupon payment = principal + interest. I guess it’s just not what they want to test from this question ?
I figured this might be where your confusion arose. Just think of bond coupon payments as the interest payments. The terms are generally interchangeable.
Cheers and good luck smoking L1 - you got this👍