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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 421
A deferred coupon bond is one that:
Select an option first.
Correct answer: B — Delays the start of coupon payments to a future date
Explanation: B is correct. Deferred coupon bonds postpone cash interest payments for a set period. This helps issuers manage near-term cash flows. A is a premium coupon. C is a contingent convertible. D is a spread-reset bond.
Question 422
What does a bond's maturity date represent?
Select an option first.
Correct answer: C — The date on which the issuer repays the full principal to the bondholder
Explanation: C is correct. The maturity date is when the bond's life ends: the issuer pays the final coupon and returns the par value to the bondholder. A is the first coupon date. B happens any time in the secondary market. D is incorrect—credit ratings have no fixed expiration date.
Question 423
A bond is said to trade at a discount when:
Select an option first.
Correct answer: B — Its price in the market is below its par value
Explanation: B is correct. A bond trades at a discount when its market price is below par—this happens when the required yield exceeds the coupon. A and C describe premium bonds. D is not the defining criterion for discount or premium.
Question 424
The primary market for bonds is best described as the market where:
Select an option first.
Correct answer: B — New bond issues are first sold by issuers to raise capital
Explanation: B is correct. The primary market is where bonds are originally issued—the proceeds go to the issuer. Secondary market trading (A) transfers bonds between investors and raises no new capital for the issuer. C and D describe other market functions.
Question 425
A callable bond gives the right to:
Select an option first.
Correct answer: B — The issuer to redeem the bond before maturity at a specified price
Explanation: B is correct. A call option embedded in a bond benefits the issuer—it can redeem the bond early, typically when interest rates fall and refinancing at lower rates is attractive. A describes a put option (putable bond). C is a convertible bond. D is a deferral provision.
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Question 426
A putable bond benefits the bondholder primarily because:
Select an option first.
Correct answer: B — The holder can force the issuer to repurchase the bond at a set price if rates rise
Explanation: B is correct. A put option protects the bondholder: if interest rates rise (bond price falls), the holder can put the bond back to the issuer at par, limiting losses. Since this is valuable to the holder, putable bonds typically carry lower yields than equivalent non-putable bonds.
Question 427
A convertible bond allows:
Select an option first.
Correct answer: B — The bondholder to exchange the bond for a specified number of equity shares
Explanation: B is correct. Convertible bonds give the holder an option to convert into common shares at a preset conversion ratio. This provides upside if the stock price rises. A has the wrong party—it's the holder, not the issuer. C describes a rate switch. D is an extendable bond.
Question 428
A repurchase agreement (repo) is best described as:
Select an option first.
Correct answer: B — A short-term borrowing arrangement where securities are sold with an agreement to buy them back at a higher price
Explanation: B is correct. In a repo, one party sells securities and simultaneously agrees to repurchase them at a set future date and higher price. The price difference represents the interest (repo rate). It is a key short-term funding tool for financial institutions. A describes a callable bond. C is a covenant provision. D is a buyback operation.
Question 429
Commercial paper is best described as:
Select an option first.
Correct answer: B — Short-term unsecured promissory notes issued by companies to fund working capital
Explanation: B is correct. Commercial paper (CP) is a short-term (typically less than 270 days), unsecured obligation issued by corporations to meet short-term funding needs. A describes long-term bonds. C describes Treasury bills. D describes asset-backed securities.
Question 430
Investment-grade bonds differ from high-yield bonds primarily in:
Select an option first.
Correct answer: B — The issuer's credit quality and the assessed probability of default
Explanation: B is correct. Investment-grade bonds are issued by borrowers with higher credit quality (lower default risk). High-yield (or 'junk') bonds have lower credit ratings and higher default probability, so they pay higher yields to compensate investors for greater risk. A, C, D are not the defining distinction.
Question 431
Sovereign bonds are issued by:
Select an option first.
Correct answer: B — National central governments to fund expenditures
Explanation: B is correct. Sovereign bonds are debt obligations of national governments. Central banks don't issue sovereign bonds to raise fiscal revenue—they conduct monetary policy. D describes supranational bonds, which are distinct.
Question 432
A covered bond differs from a regular asset-backed security primarily because:
Select an option first.
Correct answer: A — The collateral pool stays on the issuer's balance sheet and the issuer remains liable
Explanation: A is correct. In a covered bond, the collateral pool remains on the issuer's balance sheet and the issuer guarantees repayment—giving investors dual recourse (to the collateral and to the issuer). In traditional ABS (B), assets are transferred to an SPV and the originator bears no further obligation. C and D are incorrect.
Question 433
Which of the following is an affirmative covenant?
Select an option first.
Correct answer: C — The issuer will provide audited financial statements to bondholders annually
Explanation: C is correct. Affirmative (positive) covenants require the issuer to do something—like maintaining insurance, filing financial reports, or paying taxes. Negative covenants (A, B, D) restrict the issuer from certain actions.
Question 434
The yield on a sovereign bond is typically used as a benchmark because:
Select an option first.
Correct answer: B — They are considered default-risk-free for domestic-currency obligations and are highly liquid
Explanation: B is correct. Government bonds issued in their own currency are considered free from default risk and are highly liquid—making them ideal benchmarks for pricing other bonds. A is false. C and D are incorrect.
Question 435
Short-term government securities with maturities of one year or less are most commonly called:
Select an option first.
Correct answer: C — Treasury bills
Explanation: C is correct. Treasury bills (T-bills) have maturities of one year or less and are typically issued at a discount to face value. Treasury notes (A) have maturities of 1–10 years. Treasury bonds (B) have maturities beyond 10 years. Agency bonds (D) are issued by government-sponsored entities.
Question 436
A bond's yield spread over a benchmark rate most directly reflects:
Select an option first.
Correct answer: B — Compensation for all risks the bond carries beyond the risk-free rate, including credit and liquidity risk
Explanation: B is correct. The yield spread captures all incremental risks beyond the benchmark: credit risk, liquidity risk, optionality, tax differences, etc. A is only one component. C excludes liquidity and other risks. D confuses coupon difference with yield spread.
Question 437
The primary difference between a public bond offering versus a private placement is:
Select an option first.
Correct answer: B — A private placement is sold to a limited group of sophisticated investors without full public registration
Explanation: B is correct. Private placements go to a small group of qualified investors without the full registration needed for public bonds. They are less liquid and carry fewer disclosure requirements. A reverses the logic. C is wrong—private placements are less liquid. D is false.
Question 438
A bond issued in a currency different from the issuer's home country currency is called:
Select an option first.
Correct answer: B — A Eurobond
Explanation: B is correct. A Eurobond is issued in a currency that is foreign to the market where it is placed (e.g., a US company issuing a dollar bond in Europe). Domestic bonds are issued in the issuer's home market and currency. C is an on-balance-sheet structured product. D is issued by multilateral institutions.
Question 439
A bond that gives the holder the right to demand repayment earlier than the scheduled maturity is called:
Select an option first.
Correct answer: C — A putable bond
Explanation: C is correct. A putable bond embeds a put option benefiting the holder—they can sell the bond back to the issuer at par on specified dates. A callable bond gives the issuer the early redemption right. An amortizing bond gradually repays principal on schedule. A step-up bond has rising coupons.
Question 440
Which of the following best describes a special purpose entity (SPE) in a securitization?
Select an option first.
Correct answer: B — A bankruptcy-remote legal entity that holds the pool of assets backing the securities
Explanation: B is correct. The SPE (or SPV) is a legally separate entity that owns the collateral pool and issues the ABS. Being 'bankruptcy-remote' means the SPE's assets are protected even if the originator fails. A is a corporate subsidiary. C describes a guarantor. D is a credit rating function.
Question 441
A 'make-whole' call provision differs from a standard call in that:
Select an option first.
Correct answer: B — The call price is set high enough that the bondholder is compensated for foregone cash flows—typically at a premium well above market value
Explanation: B is correct. A make-whole call requires the issuer to pay a price based on discounting remaining cash flows at a very low rate (e.g., Treasury rate plus a small spread), ensuring the bondholder doesn't lose out. A standard call uses fixed prices from a call schedule.
Question 442
Why might a bond indenture include a cross-default clause?
Select an option first.
Correct answer: B — So that a default on one debt obligation triggers a default on all bonds with this clause
Explanation: B is correct. A cross-default clause means that if the issuer defaults on any material debt, it automatically constitutes a default on this bond too. This protects bondholders from being disadvantaged if the issuer defaults selectively. A, C, D are unrelated provisions.
Question 443
A bond's 'clean price' differs from its 'full price' (dirty price) in that:
Select an option first.
Correct answer: B — The full price includes accrued interest since the last coupon, while the clean price does not
Explanation: B is correct. The full (dirty) price is what the buyer actually pays: the quoted clean price plus accrued interest. Quotes in bond markets are typically clean prices to make comparison easier, since accrued interest changes daily. A reverses the definition. C and D are wrong.
Question 444
A bond's accrued interest is best described as:
Select an option first.
Correct answer: B — The portion of the next coupon that has already accumulated since the last coupon payment date
Explanation: B is correct. Accrued interest represents the coupon that has built up since the last payment date. When a bond is sold, the buyer pays the accrued interest to the seller to compensate them for the coupon days they held the bond. A is future interest, not accrued. C and D are incorrect.
Question 445
In a securitization, 'credit enhancement' refers to mechanisms that:
Select an option first.
Correct answer: B — Protect senior investors from losses by absorbing credit losses at the subordinate level
Explanation: B is correct. Credit enhancement (subordination, overcollateralization, reserve accounts, etc.) provides a buffer so that losses from defaulting loans hit junior tranches first, protecting senior tranches. This allows senior tranches to achieve higher ratings and lower yields. A is wrong—credit enhancement lowers yields on senior tranches.
Question 446
What distinguishes a 'global bond' from a Eurobond?
Select an option first.
Correct answer: B — A global bond is simultaneously offered in multiple markets worldwide, including the US domestic market and international markets
Explanation: B is correct. A global bond is offered simultaneously across multiple international markets (including the US registered market and Eurobond markets). A Eurobond is sold outside the issuer's home market. The 'Euro' in Eurobond refers to 'outside', not the euro currency.
Question 447
Agency bonds in the United States are issued by:
Select an option first.
Correct answer: B — Government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac
Explanation: B is correct. Agency bonds are issued by GSEs (e.g., Fannie Mae, Freddie Mac) and federal agencies. They are not direct US Treasury obligations but generally carry implicit or explicit government backing. A is Treasury debt. C is sovereign or supranational. D is municipal bonds.
Question 448
In the context of bond markets, 'book building' refers to:
Select an option first.
Correct answer: B — A method of price discovery where the underwriter collects investor orders to set the final bond price and allocation
Explanation: B is correct. Book building is the primary market issuance method where the underwriter gathers investor demand at various yield levels (orders) to determine the clearing yield and allocate the new issue. A is financial reporting. C is accounting. D is index construction.
Question 449
A bond that pays coupons in kind (PIK) means:
Select an option first.
Correct answer: B — Coupons are paid by issuing additional bonds or equity rather than cash
Explanation: B is correct. PIK bonds pay interest by issuing more bonds or equity rather than cash, helping issuers preserve cash during the bond's early years. This is common in leveraged buyouts. A, C, D are incorrect.
Question 450
When a bond is described as 'plain vanilla,' it typically means:
Select an option first.
Correct answer: B — It is a simple fixed-rate bullet bond with no embedded options
Explanation: B is correct. 'Plain vanilla' bonds are straightforward: fixed coupon, bullet maturity, no call/put/convert options—the most basic structure. FRNs, zeros, convertibles, and callables are all variations from this base case.
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