Series 7 Exam Question 356: Answer and Explanation

Question: 356

One of your clients purchased a 4 percent ABC convertible bond yielding 5 percent and convertible at $50. If your client holds the bond until maturity, how much will they receive?

• A. $1,000
• B. $1,020
• C. $1,025
• D. $1,050

Correct Answer: B

Explanation:

B. There is a lot of information in this question that was not required to come up with an answer. All you needed to know was that it is a 4 percent bond and that your client held it until maturity. The fact that it was yielding 5 percent and that it is a convertible bond is not relevant to the question. When investors hold a bond until maturity, they receive par value (usually $1,000). However, if the bond is paying interest, holders will also receive their last coupon payment at maturity. It is a 4 percent bond, so investors will receive $40 per year interest ($4 percent of $1,000 par) broken down into two $20 semiannual payments. So in this case, your client will receive $1,020 at maturity.