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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 511
When a bond is described as 'investment grade,' this most likely means its credit rating is:
Select an option first.
Correct answer: B — BBB- or higher by major rating agencies
Explanation: Investment grade starts at BBB- (S&P/Fitch) or Baa3 (Moody's) and above. Anything below that is speculative grade (high yield). A is wrong — that describes junk bonds. C is too restrictive — BBB bonds are also investment grade. D is not the definition of investment grade.
Question 512
The primary difference between a bearer bond and a registered bond is:
Select an option first.
Correct answer: C — Bearer bonds are owned by whoever physically holds them, with no ownership record kept
Explanation: Bearer bonds have no ownership registry — whoever holds the physical certificate collects interest and principal. Registered bonds track owners by name. Bearer bonds are now rare due to tax evasion concerns. A, B, and D are all incorrect statements.
Question 513
A floating-rate bond's coupon is reset periodically. The reference rate plus an additional fixed amount is called the:
Select an option first.
Correct answer: C — Quoted margin
Explanation: The quoted margin (also called the spread) is the fixed addition to the reference rate that determines the coupon. For example, LIBOR + 150 bps means 150 bps is the quoted margin. A is a broader term for yield differences. B refers to an upper limit on the coupon. D is a lower limit.
Question 514
Which of the following best describes a step-up bond?
Select an option first.
Correct answer: B — A bond whose coupon increases on scheduled dates according to a preset schedule
Explanation: Step-up bonds have coupons that increase on predetermined dates. They benefit issuers if rates fall (they already locked in the schedule) but protect investors from certain credit risks. A is the opposite. C describes a convertible. D describes an inflation-linked bond.
Question 515
In the context of bonds, 'tenor' refers to:
Select an option first.
Correct answer: B — The time remaining until the bond matures
Explanation: Tenor (or term) is the remaining life of a bond — how long until maturity. A refers to payment frequency. C is credit quality. D is related to the concept of premium/discount but not called tenor.
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Question 516
Which of the following is a characteristic of a putable bond from the bondholder's perspective?
Select an option first.
Correct answer: B — It allows the holder to sell the bond back to the issuer at a set price before maturity
Explanation: A put provision gives the bondholder the right to sell the bond back at a predetermined price. This protects the investor if rates rise (bond prices fall). A is wrong — putable bonds offer lower yields because the put is valuable to the holder. C is wrong — the put benefits the holder not the issuer. D is the advantage of a call, not a put.
Question 517
Sovereign bonds are best described as debt issued by:
Select an option first.
Correct answer: B — National governments
Explanation: Sovereign bonds are issued by national (central) governments, such as U.S. Treasuries or UK Gilts. A is corporate debt. C is supranational debt. D is sub-sovereign or municipal debt.
Question 518
A bond issued in a country's domestic market, denominated in the local currency, by a foreign issuer is called a:
Select an option first.
Correct answer: B — Yankee bond (or its local equivalent)
Explanation: A foreign bond is issued in a domestic market by a foreign entity and denominated in the local currency (e.g., a Yankee bond is issued in the US by a non-US entity in USD). A Eurobond is issued outside the issuer's home country. C is issued simultaneously in multiple markets. D is a specific restructuring instrument.
Question 519
In a repo transaction, the party that sells securities and agrees to repurchase them later is effectively:
Select an option first.
Correct answer: A — Lending securities and borrowing cash
Explanation: In a repurchase agreement, the seller delivers securities in exchange for cash, agreeing to buy them back later at a higher price. The seller is essentially borrowing cash, using securities as collateral. B describes the reverse repo side. C is wrong — ownership transfers temporarily, not permanently. D is unrelated.
Question 520
Which of the following best explains why bonds issued with sinking fund provisions typically offer lower yields than otherwise comparable bonds without them?
Select an option first.
Correct answer: B — Sinking funds reduce default risk by requiring periodic principal repayments
Explanation: Sinking funds require the issuer to retire portions of the principal over time, reducing the outstanding balance and lowering the probability of a large lump-sum default at maturity. Lower risk means investors accept a lower yield. A is wrong — sinking funds reduce duration. C describes convertibility. D is incorrect.
Question 521
When a bond trades 'flat,' it means:
Select an option first.
Correct answer: B — It is trading without accrued interest
Explanation: Trading flat means the buyer pays only the clean price — no accrued interest is added. This typically happens with defaulted bonds or zero-coupon bonds. A is wrong — par and flat are unrelated. C describes a specific yield/price relationship. D is unrelated.
Question 522
The dirty price of a bond is best defined as:
Select an option first.
Correct answer: C — The clean price plus accrued interest
Explanation: The dirty price (or full price) is what the buyer actually pays — it equals the clean (quoted) price plus any interest accrued since the last coupon date. A is wrong. B describes the clean price roughly. D describes the issue price.
Question 523
A bond that pays no periodic interest and is issued at a significant discount to its face value is called a:
Select an option first.
Correct answer: C — Zero-coupon bond
Explanation: Zero-coupon bonds pay no interim coupons. They are issued at a deep discount and redeemed at face value, with the difference representing the investor's total return. A pays variable coupons. B pays increasing coupons. D allows conversion to equity.
Question 524
Which of the following parties in a bond transaction is responsible for verifying that the issuer complies with bond covenants?
Select an option first.
Correct answer: B — The trustee
Explanation: The trustee represents the interests of bondholders and monitors covenant compliance. If the issuer breaches a covenant, the trustee can act on behalf of bondholders. A underwrites the issuance. C handles interest payments. D manages ownership records.
Question 525
A supranational bond is issued by:
Select an option first.
Correct answer: B — An entity owned by multiple national governments
Explanation: Supranational organizations like the World Bank or IMF are owned by member nations. Their bonds are considered extremely high quality. A is corporate. C is a foreign (Yankee/Samurai-style) bond. D is sovereign.
Question 526
Which of the following is most accurate about the secondary bond market?
Select an option first.
Correct answer: B — Most bonds trade over-the-counter between dealers
Explanation: The secondary bond market is primarily OTC (over-the-counter), meaning trades occur directly between dealers and investors rather than on a centralized exchange like equities. A is wrong — most bonds are OTC. C is wrong. D is wrong — corporate and other bonds also trade secondarily.
Question 527
A bond's indenture is best described as:
Select an option first.
Correct answer: B — The legal contract between the issuer and bondholders
Explanation: The indenture is the formal legal document that governs the bond — it specifies the terms, covenants, payment structure, and bondholder rights. A is just a payment schedule. C is the credit rating. D is the underwriting agreement.
Question 528
When an issuer calls bonds using a make-whole call provision, the redemption price is:
Select an option first.
Correct answer: C — Calculated as the present value of remaining cash flows at a low reference rate, usually resulting in a premium to par
Explanation: A make-whole call requires the issuer to pay bondholders the present value of all future cash flows discounted at a low rate (like Treasury yield + a small spread). This nearly always results in a price above par, making early calls expensive for issuers. A is the typical call price for standard calls. B and D are wrong.
Question 529
A global bond is best described as one that:
Select an option first.
Correct answer: C — Is simultaneously issued and traded in multiple markets worldwide
Explanation: Global bonds are large issues designed to be sold simultaneously across multiple markets and currencies, typically by high-quality issuers. They offer broad market access. A and B describe foreign bonds. D is not the definition.
Question 530
Which of the following most accurately describes a credit-linked note?
Select an option first.
Correct answer: B — A bond whose returns are linked to the credit performance of a reference entity
Explanation: A credit-linked note is a structured product whose performance depends on a credit event related to a reference entity (e.g., if that entity defaults, the noteholder takes a loss). A describes a step-up. C is a contingent convertible. D is a zero-coupon with capital guarantee.
Question 531
The term 'bullet bond' refers to a bond that:
Select an option first.
Correct answer: B — Repays principal in one lump sum at maturity with no amortization
Explanation: A bullet bond has a single principal repayment at maturity — no sinking fund, no amortization. Most plain-vanilla corporate and government bonds are bullet structures. A is wrong. C describes a secured bond. D describes a premium bond's pricing.
Question 532
In which situation would a bondholder most benefit from a put provision?
Select an option first.
Correct answer: C — When interest rates have risen significantly since issuance
Explanation: When rates rise, existing bond prices fall below par. A put lets the holder sell back the bond at the put price (usually par), avoiding the loss. When rates fall (A), bond prices rise — no need to put. B and D indicate favorable conditions where the put has no value.
Question 533
Which of the following is the primary purpose of a paying agent in a bond transaction?
Select an option first.
Correct answer: B — To distribute coupon and principal payments to bondholders
Explanation: The paying agent (often a bank) is responsible for actually disbursing interest and principal payments to registered bondholders. A is the underwriter. C is the trustee's role for collateral. D is also the trustee.
Question 534
A bond issued with an original issue discount (OID) means it was:
Select an option first.
Correct answer: A — Issued at a price below its face value
Explanation: OID bonds are sold at a price below face value. The discount represents part of the investor's return. Zero-coupon bonds are the extreme case of OID. B, C, and D do not correctly define OID.
Question 535
What is the key distinction between term bonds and serial bonds?
Select an option first.
Correct answer: C — Term bonds all mature on the same date; serial bonds mature in installments over time
Explanation: Term bonds have a single maturity date for the entire issue. Serial bonds mature in portions over time, reducing reinvestment risk for investors. A is wrong. B reverses the definitions. D is wrong.
Question 536
Which of the following describes an asset-backed security at a basic structural level?
Select an option first.
Correct answer: B — A bond whose payments come from a pool of underlying financial assets
Explanation: ABS are backed by pools of financial assets (mortgages, auto loans, credit card receivables) whose cash flows are passed through to bondholders. A is a guaranteed bond. C is a commodity-linked instrument. D is a bond with warrants.
Question 537
A bond described as 'senior secured' means that in a default:
Select an option first.
Correct answer: C — It has a claim on specific collateral and is paid before unsecured creditors
Explanation: Senior secured bonds have a lien on specific assets. In liquidation, secured creditors get paid from those assets before unsecured creditors receive anything. A describes subordinated debt. B is about coupons, not seniority. D is a guarantee, not collateral.
Question 538
Which of the following is most accurate about the relationship between bond covenants and yield?
Select an option first.
Correct answer: C — Bonds with more restrictive covenants typically have lower yields
Explanation: More restrictive covenants protect bondholders from risky issuer behavior, reducing default risk. Lower risk = lower required yield. A and B are wrong. D is incorrect — covenants do affect risk and therefore yield.
Question 539
A bond has a face value of $1,000 and a coupon rate of 6% paid semi-annually. What is the semi-annual coupon payment?
Select an option first.
Correct answer: A — $30
Explanation: Semi-annual coupon = Face value × Annual coupon rate / 2 = $1,000 × 6% / 2 = $1,000 × 0.03 = $30. B would be the annual coupon. C would be a quarterly coupon. D is too high.
Question 540
A bond with $1,000 face value was issued at $920. If it matures in 5 years, what is the total dollar discount the investor will earn at maturity (ignoring coupons)?
Select an option first.
Correct answer: B — $80
Explanation: The investor pays $920 and receives $1,000 at maturity. The gain = $1,000 − $920 = $80. This $80 represents the total capital gain (ignoring coupon income). D would be $80/5 = annual accretion but is not the total discount.
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