For a particular bond issue with a level debt service schedule, which of the following is true?

Prepare for the CPFO Debt Management Exam. Study effectively with flashcards and multiple choice questions, complete with hints and detailed explanations. Get exam-ready!

In a bond issue with a level debt service schedule, the structure of payments typically involves making equal total payments (principal plus interest) over the life of the bond. In this scenario, the correct statement highlights that the principal balance decreases slowly early in the repayment period.

This occurs because, in the initial stages of repayment, a larger portion of the total payment is allocated to interest rather than principal. As the outstanding principal decreases over time, the interest component of the payment reduces, allowing a greater portion of the fixed payment to apply toward the principal balance in later years. This results in relatively gradual reductions of the principal balance in the early months or years of repayment.

The other statements do not align with the characteristics of a level debt service schedule. Interest payments actually decrease over time as the principal balance reduces, and statements regarding principal balance increasing or all payments being equal do not accurately reflect the nature of the debt service arrangement.

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