8008 Exam Dumps | A bullet bond and an amortizing loan are issued at the same time with the same maturity and with the

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 44

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Question 44/125

A bullet bond and an amortizing loan are issued at the same time with the same maturity and with the same principal. Which of these would have a greater credit exposure halfway through their life?

A. Indeterminate with the given information

B. They would have identical exposure half way through their lives

C. The amortizing loan

D. The bullet bond

Correct Answer: D

Explanation
A bullet bond is a bond that pays coupons covering interest during the life of the bond and the principal at maturity. An amortizing loan pays the interest as well as a part of the principal with every payment. Therefore, the exposure of the amortizing loan continually reduces, and approaches zero towards the end of its life. The bullet bond will always have a higher exposure at any time during its life when compared to an equivalent amortizing loan. Hence Choice 'd' is the correct answer.

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