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IBBC CAPITAL ACADEMY / 2027

Bond cash-flow shapes and embedded choices

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Explain payment structures using mechanisms and limitations.
  • Explain optionality using mechanisms and limitations.
  • Explain jurisdictional context using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Payment structures

A bullet bond repays principal at maturity; amortizing debt repays it progressively, changing outstanding balance, interest and reinvestment exposure.

A zero-coupon bond normally pays no periodic interest and is priced through discounting its final payment; discount accretion is not a periodic cash receipt.

Optionality

Floating coupons reset using a reference rate plus a contractual spread; caps, floors, reset lags and credit changes can prevent stable market value.

An issuer call can force early redemption and limit investor upside when rates fall; a holder put grants an investor early-exit right under contract.

Jurisdictional context

Inflation-linked cash flows may adjust principal or interest using a defined index; real purchasing-power protection depends on index design and tax treatment.

Issue location, governing law, withholding and investor eligibility affect issuance and trading; currency alone does not classify every cross-border bond.

Formula and assumptions

Floating coupon=notional×(reference+quoted spread)×accrual fraction

Original applied case: Bond cash-flow shapes and embedded choices

  1. A 1,000 floating note resets at reference 4% plus 1.5%, with quarterly simple accrual.
  2. For a 0.25-year accrual, coupon=1,000×0.055×0.25=13.75.
  3. A cap, floor or different day-count convention would require an explicit adjustment.

Errors to catch

  • Do not assume: Amortizing debt pays every principal unit only at maturity.
  • Do not assume: Zero-coupon bonds pay annual cash coupons.
  • Do not assume: A floating coupon eliminates credit and price risk.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.