Estimating Expected Cash Flows - Difficulties

b. identify the types of bonds for which estimating the expected cash flows is difficult,
and explain the problems encountered when estimating the cash flows for
these bonds;


Bonds With Difficult Expected Cash Flow Estimation
The bonds for which it is difficult to estimate expected cash flows fall into three categories:

1.Bonds for which the issuer or investor has an option or right to change the contract due date for the payment of the principal. These include callable bonds, puttable bonds, MBSs and ABSs.

2.Bonds for which coupon payment rate is reset occasionally based on a formula with values that change, such as reference rates, prices or exchange rates. A floating-rate bond would be an example of this type of category.

3. Bonds for which investor has the option to convert or exchange the security for common stock.

For more See
http://www.investopedia.com/study-guide/cfa-exam/level-1/fixed-income/cfa35.asp

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