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Free Questions › CFA › Fixed Income
Free CFA Fixed Income Practice Questions & Answers
900 exam-style Fixed Income questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 331
For a callable bond, which relationship is most accurate?
Select an option first.
Correct answer: B — Callable bond value = straight bond value − call option value.
Explanation: The issuer holds the call option. From the investor’s perspective, that option reduces value: Callable bond = straight bond − value of issuer’s call. A: Adds the option instead of subtracting. C/D: Those relate to putable bonds, not callable ones.
Question 332
When interest rate volatility increases, what typically happens to the value of a putable bond, all else equal?
Select an option first.
Correct answer: C — It increases.
Explanation: The put option is valuable to the investor. Higher rate volatility makes that option more valuable, so the putable bond’s value rises. A: That would be true for a callable bond, not a putable one. B/D: Both ignore the option’s changing value.
Question 333
Effective duration is preferred over simple modified duration for bonds with embedded options because:
Select an option first.
Correct answer: C — It captures price changes when cash flows change with interest rates.
Explanation: For bonds with options, cash flows themselves can change when rates move (e.g., bond gets called). Effective duration uses a pricing model to capture this. A: It explicitly measures sensitivity to yield changes. B: Coupon alone is not enough. D: It is designed precisely to handle embedded options.
Question 334
A convertible bond is best described as:
Select an option first.
Correct answer: A — A straight bond plus a call option on the issuer’s stock.
Explanation: A convertible bond gives the holder the right to convert into shares, which is economically a call option on the stock. B/D: Subtracting options would reduce value; convertibles are more valuable than straight bonds. C: The option is to buy shares, not sell them.
Question 335
Macaulay duration is best described as:
Select an option first.
Correct answer: A — The weighted average time to receive the bond’s cash flows
Explanation: Macaulay duration is the present-value-weighted average time (in years) until the bond’s cash flows are received.
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Question 336
Modified duration is primarily used to estimate:
Select an option first.
Correct answer: C — The percentage price change for a small change in yield
Explanation: Modified duration approximates the percentage change in a bond’s price for a 1% (100 bps) change in yield, assuming small changes.
Question 337
Which of the following bonds will have the lowest effective duration, all else equal?
Select an option first.
Correct answer: B — 10-year callable bond (issuer can call at par)
Explanation: A callable bond’s price is capped when rates fall, reducing its sensitivity to yield changes—thus lower effective duration than an equivalent option-free bond.
Question 338
Convexity of a bond is best described as:
Select an option first.
Correct answer: B — The curvature in the price–yield relationship
Explanation: Convexity measures the curvature of the bond price–yield relationship and improves duration-based price change estimates for larger yield moves.
Question 339
A bond’s OAS (option-adjusted spread) is most appropriately interpreted as:
Select an option first.
Correct answer: B — The spread over the benchmark curve after removing the value of embedded options
Explanation: OAS is the constant spread added to the benchmark curve in a binomial or Monte Carlo model after adjusting for the value of embedded options.
Question 340
Negative convexity is most likely observed in:
Select an option first.
Correct answer: C — Callable mortgage-backed securities
Explanation: Callable and prepayable structures (like many MBS) can exhibit negative convexity when falling rates increase the likelihood of calls/prepayments, capping price appreciation.
Question 341
Key rate duration is used to measure:
Select an option first.
Correct answer: B — Sensitivity to non‑parallel shifts at specific maturities
Explanation: Key rate duration isolates curve movements at specific maturities.
Question 342
A bond with negative convexity will:
Select an option first.
Correct answer: C — Gain less when yields fall
Explanation: Negative convexity (e.g., callable/MBS) limits upside when yields fall.
Question 343
A putable bond will have:
Select an option first.
Correct answer: A — Lower yield than an option‑free bond
Explanation: Put option benefits investor → lower required yield.
Question 344
The law of one price in fixed income valuation implies:
Select an option first.
Correct answer: B — Two portfolios with identical cash flows must have the same price
Explanation: Arbitrage‑free valuation requires identical cash flows to have identical prices.
Question 345
A recombining interest‑rate tree is one in which:
Select an option first.
Correct answer: B — Rates converge back to common nodes
Explanation: Recombining trees merge paths to reduce the number of nodes.
Question 346
A callable bond’s value in a binomial tree is determined by:
Select an option first.
Correct answer: B — Taking the minimum of continuation value and call price
Explanation: Issuer will call when continuation value > call price → value = call price.
Question 347
A putable bond’s value in a binomial tree is determined by:
Select an option first.
Correct answer: B — Maximum of continuation value and put price
Explanation: Investor exercises the put when continuation value < put price.
Question 348
The OAS of a callable bond is:
Select an option first.
Correct answer: B — Lower than its Z‑spread
Explanation: Z‑spread includes option cost; OAS removes option value → OAS < Z‑spread for callable bonds.
Question 349
A duration‑neutral curve trade requires:
Select an option first.
Correct answer: C — Matching total portfolio duration
Explanation: Duration neutrality isolates curve shape changes.
Question 350
Effective duration is required when:
Select an option first.
Correct answer: B — Bond has embedded options
Explanation: Effective duration accounts for option‑driven cash flow changes.
Question 351
A bond with high convexity will:
Select an option first.
Correct answer: B — Gain more when yields fall
Explanation: High convexity increases upside when yields fall.
Question 352
A putable bond is least likely to be exercised when:
Select an option first.
Correct answer: B — Yields fall sharply
Explanation: When yields fall, continuation value is high → investor keeps the bond.
Question 353
A Monte Carlo model is required when:
Select an option first.
Correct answer: A — Cash flows are path‑dependent
Explanation: Path‑dependent cash flows (e.g., MBS) require simulation.
Question 354
Interest Rate Trees A recombining binomial tree is preferred because
Select an option first.
Correct answer: B — It reduces the number of nodes
Explanation: Recombining trees merge nodes, reducing computational complexity.
Question 355
Callable & Putable Valuation A callable bond’s value at a node equals
Select an option first.
Correct answer: C — Minimum of continuation value and call price
Explanation: Issuer calls when continuation value > call price.
Question 356
A putable bond’s value at a node equals
Select an option first.
Correct answer: B — Maximum of continuation value and put price
Explanation: Investor exercises the put when continuation value < put price.
Question 357
For a callable bond, the relationship between spreads is
Select an option first.
Correct answer: B — OAS < Z-spread
Explanation: Z-spread includes option cost → Z > OAS.
Question 358
Duration & Convexity Effective duration is required when
Select an option first.
Correct answer: B — Embedded options affect cash flows
Explanation: Effective duration captures option-driven cash flow changes.
Question 359
A bond with high convexity will
Select an option first.
Correct answer: B — Gain more when yields fall
Explanation: High convexity increases upside when yields fall.
Question 360
Key rate duration measures
Select an option first.
Correct answer: B — Sensitivity to shifts at specific maturities
Explanation: Key rate duration isolates curve movements at specific points.
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