CMFAS CM-EIP Bonds & Fixed Income question: Excluded Investment Products (EIPs)

CMFAS CM-EIPBonds & Fixed Income

Why are plain-vanilla bonds classed as Excluded Investment Products (EIPs) rather than more complex products?

A Because they are guaranteed by the government against any loss of the principal
B Because they never trade in a secondary market, so prices cannot fall
C Because they are simple, familiar and have predictable contractual cash flows
D Because they carry no credit or interest-rate risk for the investor at all

Show the answer and explanation

Answer: C. Because they are simple, familiar and have predictable contractual cash flows

Straightforward bonds are simple, familiar instruments with predictable contractual cash flows, so they are classed as EIPs; bonds with embedded derivatives or structured features are treated as more complex.

Common mistake

Assuming EIP status implies a guarantee or the absence of risk.

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CMFAS CM-EIP Bonds & Fixed Income question: Excluded Investment Products (EIPs)

Answer: C. Because they are simple, familiar and have predictable contractual cash flows

Common mistake

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CMFAS CM-EIP Bonds & Fixed Income question: Excluded Investment Products (EIPs)

Answer: C. Because they are simple, familiar and have predictable contractual cash flows

Common mistake

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