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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 451
Which of the following bonds would most likely have the highest yield at issuance, all else equal?
Select an option first.
Correct answer: C — A 5-year senior unsecured high-yield bond
Explanation: C is correct. High-yield (below investment-grade) bonds have the highest default risk and therefore demand the highest yield compensation. D (AAA sovereign) would yield least. A (secured IG) < B (unsecured IG) < C (unsecured HY) in yield, reflecting increasing risk.
Question 452
In a bond market context, which entity acts as a 'trustee'?
Select an option first.
Correct answer: B — An independent party appointed to represent and protect the interests of bondholders under the indenture
Explanation: B is correct. The trustee is an independent institution (often a bank's trust department) that acts on behalf of all bondholders—monitoring covenant compliance, holding collateral, and enforcing the terms of the indenture. A is a rating agency. C is an underwriter. D is a guarantor.
Question 453
Subordinated debt ranks below senior debt in a bankruptcy because:
Select an option first.
Correct answer: B — Its holders have agreed to absorb losses before senior debtholders in exchange for higher yield
Explanation: B is correct. Subordinated bondholders accept lower priority in the capital structure, meaning they are only paid after senior debtholders in a bankruptcy—in exchange for higher yields. A is true but not the reason for subordination. C is not always the case. D is irrelevant.
Question 454
A 'sinking fund' provision in a bond indenture requires the issuer to:
Select an option first.
Correct answer: B — Retire a portion of the outstanding bond principal periodically before final maturity
Explanation: B is correct. A sinking fund requires the issuer to periodically retire part of the bond (via open market purchases or a call at par), reducing refinancing risk at maturity. A describes escrow accounts. C is the opposite—it retires, not issues, debt. D is a liquidity covenant.
Question 455
The credit rating of a bond is primarily designed to convey:
Select an option first.
Correct answer: B — An independent assessment of the issuer's ability to meet its debt obligations
Explanation: B is correct. Credit ratings (e.g., AAA, BB+) summarize an agency's assessment of the likelihood that an issuer will make timely interest and principal payments. They do not predict price (A), measure liquidity (C), or set relative coupon levels (D).
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Question 456
A sovereign bond that is issued in a foreign currency is riskier for the issuing government because:
Select an option first.
Correct answer: B — The government cannot print the foreign currency to repay the debt if needed
Explanation: B is correct. A government can theoretically print its own currency to service local-currency debt, but it cannot create a foreign currency. This makes foreign-currency sovereign debt riskier—investors demand higher yields, and the country faces exchange-rate risk. A, C, and D are incorrect.
Question 457
Supranational bonds are issued by institutions such as:
Select an option first.
Correct answer: B — International organizations owned by multiple member countries, such as the World Bank
Explanation: B is correct. Supranational organizations (e.g., World Bank, IMF, European Investment Bank) are owned by multiple sovereign states. They issue bonds in capital markets to fund development and receive very high credit ratings. A is sovereign debt. C is corporate debt. D is monetary policy activity.
Question 458
Which type of bond is most likely to be used by a municipality to fund local infrastructure?
Select an option first.
Correct answer: B — A municipal bond (non-sovereign government bond) backed by tax revenues or project cash flows
Explanation: B is correct. Municipalities issue non-sovereign bonds backed by tax revenues (general obligation) or specific project revenues (revenue bonds) to fund schools, roads, and utilities. The other instruments are issued by banks, corporations, or companies.
Question 459
When a bond is said to be 'unsecured,' it means:
Select an option first.
Correct answer: B — No specific assets are pledged as collateral backing the bond
Explanation: B is correct. Unsecured bonds (debentures) are backed only by the general creditworthiness of the issuer, not by specific pledged assets. They rank below secured debt in bankruptcy. A is wrong—unsecured bonds have contractual obligations. C and D are unrelated to security status.
Question 460
The tenor of a bond refers to:
Select an option first.
Correct answer: B — The original term to maturity at issuance
Explanation: B is correct. Tenor is the original length of the bond's life at issuance (e.g., a 10-year bond has a tenor of 10 years). It differs from 'time to maturity,' which decreases as the bond ages. A is coupon frequency. C is yield. D is trade volume.
Question 461
In bond markets, 'on-the-run' bonds refer to:
Select an option first.
Correct answer: B — The most recently issued government bonds of a given maturity, which are the most liquid
Explanation: B is correct. On-the-run bonds are the latest issued government securities of a given maturity (e.g., 10-year Treasury). They trade at tighter spreads due to high liquidity. 'Off-the-run' bonds are older issues that are less liquid. A, C, D are unrelated.
Question 462
An asset-backed security (ABS) derives its cash flows from:
Select an option first.
Correct answer: B — A pool of underlying financial assets such as loans or receivables
Explanation: B is correct. ABS cash flows come from a pool of assets—mortgages, auto loans, credit card receivables, etc.—transferred to an SPV. Investors are paid from these underlying cash flows. A is for regular corporate bonds. C is sovereign debt. D is incorrect—ABS is rated based on the pool and structure.
Question 463
A repo's 'haircut' refers to:
Select an option first.
Correct answer: B — The discount applied to the collateral's market value to determine the cash lent
Explanation: B is correct. The haircut is a risk buffer: if collateral is worth $100, a lender might only lend $95 (5% haircut). This protects against price declines in the collateral. A is a fee. C is a break cost. D is the repo rate.
Question 464
A bond market's G-spread is calculated as:
Select an option first.
Correct answer: A — The bond's yield minus the yield on an on-the-run government bond of the same maturity
Explanation: A is correct. The G-spread is the simple difference between a bond's yield and the yield of a government bond of the same maturity. It is the most basic spread measure. C is the I-spread (vs. swap/LIBOR rates). D is the OAS.
Question 465
Which of the following market participants most typically uses the repo market as a short-term funding source?
Select an option first.
Correct answer: B — Dealers and financial institutions that need to fund their bond inventories overnight
Explanation: B is correct. Dealers and banks use repo heavily to fund bond positions cheaply and efficiently. They pledge bonds as collateral to borrow cash overnight or for short terms. Central banks (C) use repo as a policy tool but are not funding themselves. Retail investors and corporations using CP use other instruments.
Question 466
A medium-term note (MTN) program allows a corporation to:
Select an option first.
Correct answer: B — Continuously issue bonds of varying maturities and terms under a single registration shelf
Explanation: B is correct. An MTN shelf program lets the issuer offer bonds in varying sizes, maturities, and structures on a flexible, ongoing basis under one umbrella registration—reducing cost and time. A is the opposite—MTNs offer flexibility. C and D are incorrect.
Question 467
In a secured bond, the purpose of pledging specific collateral is to:
Select an option first.
Correct answer: B — Provide bondholders with a specific asset claim that improves recovery in default
Explanation: B is correct. Collateral gives secured bondholders a direct claim on specific assets (e.g., real estate, equipment) in a default, increasing expected recovery versus unsecured holders. A is wrong—covenants serve different purposes. C and D are incorrect.
Question 468
High-yield corporate bonds are most likely to include which feature to attract investors?
Select an option first.
Correct answer: C — Higher coupons and often maintenance-style covenants or secured collateral
Explanation: C is correct. High-yield bonds must compensate investors for greater risk: higher coupons plus potentially stricter covenants (e.g., maintenance tests) or secured collateral. Investment-grade bonds typically have looser incurrence-only covenants. A is wrong—HY bonds yield more. B reverses the typical pattern.
Question 469
Which of the following best describes a fixed-income index?
Select an option first.
Correct answer: B — A portfolio of bonds representing a segment of the bond market, used to measure performance
Explanation: B is correct. A fixed-income index tracks a specified group of bonds and allows investors and managers to benchmark performance. A is a benchmark bond, not an index. C is an algorithmic strategy. D is a credit assessment, not an index.
Question 470
A bullet bond is one that:
Select an option first.
Correct answer: B — Pays its entire principal in one lump sum at maturity
Explanation: B is correct. A bullet bond (the most standard structure) pays periodic coupons during its life and repays all principal in a single payment at maturity. A describes a callable bond. C is a zero-coupon bond. D is a floater.
Question 471
The quoted margin on a floating-rate note is best described as:
Select an option first.
Correct answer: B — The spread added to the reference rate to set each coupon payment
Explanation: B is correct. The quoted margin is fixed at issuance and added to the reference rate to determine each coupon. The required margin (or discount margin) is what the market currently demands. A is price discount/premium. C is the required margin. D is unrelated.
Question 472
A bond has a par value of $1,000 and a coupon rate of 6% paid semiannually. What is the semiannual coupon payment?
Select an option first.
Correct answer: A — $30
Explanation: A is correct. Semiannual coupon = (coupon rate × par) / 2 = (6% × $1,000) / 2 = $60 / 2 = $30. B is the annual coupon. C would require a 12% coupon rate. D would be a 3% annual coupon.
Question 473
A bond has a par value of $1,000, a coupon rate of 8%, and pays interest semiannually. What is the annual coupon payment?
Select an option first.
Correct answer: B — $80
Explanation: B is correct. Annual coupon = coupon rate × par value = 8% × $1,000 = $80. The semiannual payment would be $40 (A). C doubles the rate. D divides by 10.
Question 474
A 180-day commercial paper has a face value of $100,000 and was issued at a discount price of $97,500. What is its annualized discount yield (using a 360-day year)?
Select an option first.
Correct answer: A — 5.00%
Explanation: A is correct. Discount yield = (Face − Price) / Face × (360/days) = ($100,000 − $97,500) / $100,000 × (360/180) = $2,500/$100,000 × 2 = 2.5% × 2 = 5.00%. B is the 180-day return on face value not annualized. C uses 365 days. D is the 180-day return.
Question 475
A repo has a collateral market value of $10,000,000. The haircut is 5%. How much cash does the repo seller receive?
Select an option first.
Correct answer: B — $9,500,000
Explanation: B is correct. Cash lent = Collateral value × (1 − haircut) = $10,000,000 × (1 − 0.05) = $9,500,000. The $500,000 haircut protects the cash lender against a fall in collateral value. A ignores the haircut. C is only the haircut amount. D adds rather than subtracts the haircut.
Question 476
A repo has an opening price of $9,500,000, a repo rate of 3.00%, and a term of 30 days (360-day year). What is the repurchase price?
Select an option first.
Correct answer: A — $9,523,750
Explanation: A is correct. Repurchase price = Opening price × (1 + repo rate × days/360) = $9,500,000 × (1 + 3% × 30/360) = $9,500,000 × (1 + 0.0025) = $9,500,000 × 1.0025 = $9,523,750. B uses the full annual rate. C ignores interest. D uses 90 days.
Question 477
A bond's clean price is $98.75 per $100 par. An investor buys $500,000 par value. What is the principal amount paid (clean price portion only)?
Select an option first.
Correct answer: A — $493,750
Explanation: A is correct. Principal = (clean price / 100) × par = (98.75/100) × $500,000 = 0.9875 × $500,000 = $493,750. B is par value. C and D are incorrect.
Question 478
A bond has par value $1,000, a 7% annual coupon, and 5 years to maturity. If the required yield is 7%, what is the bond's price?
Select an option first.
Correct answer: A — $1,000
Explanation: A is correct. When the coupon rate equals the required yield, the bond prices exactly at par. PV of coupons: $70 × PVIFA(7%, 5) = $70 × 4.1002 = $287.01. PV of par: $1,000/(1.07)^5 = $712.99. Total = $1,000. B and C arise when yield ≠ coupon.
Question 479
A 2-year bond with a 5% annual coupon and $1,000 par value is priced at $990. Which of the following is closest to its yield to maturity?
Select an option first.
Correct answer: B — 5.55%
Explanation: B is correct. Since the bond is priced below par (discount), the YTM > coupon rate (5%). Using the approximate YTM formula: [(Coupon + (Par − Price)/N)] / [(Par + Price)/2] = [$50 + $10/2] / [$995] = $55/$995 ≈ 5.53%. Closest to B (5.55%). A is the coupon rate.
Question 480
A bond's price is $102.50 per $100 par, and it pays an 8% annual coupon. What is the bond's current yield?
Select an option first.
Correct answer: A — 7.80%
Explanation: A is correct. Current yield = Annual coupon / Price = $8.00 / $102.50 = 7.805% ≈ 7.80%. Since the bond is at a premium (above par), current yield < coupon rate. B is the coupon rate (only valid if price = par).
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