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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 661
A portfolio manager wants to immunize an $8,000,000 PV liability due in 4 years. A bond with Macaulay duration 4.0 is available. What value of bonds must be purchased?
Select an option first.
Correct answer: A — $8,000,000
Explanation: A is correct. To immunize, the manager needs assets whose present value equals the PV of the liability = $8,000,000, with duration matched to the 4-year horizon. The asset value needed is the PV of the liability. B is the future value. C and D are wrong.
Question 662
If a bond's G-spread is 100 bps but its OAS is 70 bps, the difference of 30 bps is most likely attributable to:
Select an option first.
Correct answer: B — The value of embedded options and the shape of the yield curve (G-spread uses a single Treasury yield while OAS uses the full spot curve)
Explanation: B is correct. OAS = Z-spread − option cost. The G-spread also reflects the shape of the yield curve since it uses a single Treasury yield rather than the full spot curve. The 30 bps gap combines the curve shape effect and option cost.
Question 663
A bond's YTM is 8% and its Macaulay duration is 6 years. What is the bond's modified duration?
Select an option first.
Correct answer: B — 5.56
Explanation: B is correct. Modified duration = Mac duration / (1 + YTM) = 6 / 1.08 = 5.556 ≈ 5.56. A is Macaulay duration. C multiplies instead of divides. D is Mac × 1.08.
Question 664
If a bond's coupon rate is higher than its yield to maturity, the bond will trade:
Select an option first.
Correct answer: C — At a premium to par
Explanation: When the coupon rate exceeds the required yield (YTM), the bond's fixed payments are more attractive than what the market demands, so investors bid up the price above par. If coupon < YTM, price < par. If coupon = YTM, price = par.
Question 665
The yield to maturity of a bond assumes which of the following?
Select an option first.
Correct answer: C — All coupons are reinvested at the YTM rate until maturity
Explanation: YTM is calculated under the assumption that all coupon payments are reinvested at that same YTM rate. If actual reinvestment rates differ, the realized return will differ from YTM. A, B, and D are not assumptions of YTM.
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Question 666
A spot rate is best described as:
Select an option first.
Correct answer: B — The yield on a zero-coupon bond for a specific maturity
Explanation: Spot rates are the yields on zero-coupon instruments for specific maturities. They represent the market's current pricing for receiving one payment at a specific future date. A is the coupon rate. C is a spread. D describes a flat yield curve assumption.
Question 667
The yield spread between a corporate bond and a government bond of the same maturity is primarily driven by:
Select an option first.
Correct answer: B — Compensation for credit risk, liquidity risk, and any embedded option risk
Explanation: The spread reflects additional risks in the corporate bond: mainly credit risk (default probability and loss severity), liquidity risk (harder to sell quickly at fair price), and embedded option risk (calls reduce value to the holder). A affects pricing but not the spread directly. C affects sensitivity, not the yield level. D is one factor but not the only one.
Question 668
When the yield curve is said to be 'inverted,' this means:
Select an option first.
Correct answer: A — Short-term rates are higher than long-term rates
Explanation: An inverted yield curve occurs when short-term interest rates exceed long-term rates. This is unusual and often seen as a recession indicator. D describes a normal (upward sloping) yield curve. B and C describe level shifts, not inversion.
Question 669
The pure expectations theory of the yield curve suggests that long-term rates are determined by:
Select an option first.
Correct answer: B — The average of current and expected future short-term rates
Explanation: Under pure expectations theory, forward rates embedded in the yield curve reflect the market's expectations of future short-term rates. A long-term rate is essentially the geometric average of expected short-term rates. C describes liquidity preference or market segmentation. D is too narrow.
Question 670
According to the liquidity preference theory of the term structure, investors will demand:
Select an option first.
Correct answer: B — A liquidity premium for holding longer-maturity bonds
Explanation: Liquidity preference theory adds a liquidity (or term) premium to pure expectations. Investors prefer short-term instruments because they are less sensitive to rate changes, so they require a premium to hold longer bonds. A, C, and D are wrong.
Question 671
If the 1-year spot rate is 4% and the 2-year spot rate is 5%, the implied 1-year forward rate one year from now is closest to:
Select an option first.
Correct answer: C — 6.0%
Explanation: Using: (1.05)² = (1.04)(1 + f). So 1.1025 = 1.04 × (1 + f) → (1 + f) = 1.1025/1.04 = 1.0601 → f ≈ 6.01%. The forward rate must be higher than the spot to make the two-year rate a geometric average of the two one-year rates.
Question 672
The G-spread of a bond is defined as:
Select an option first.
Correct answer: A — The yield on the bond minus the yield on a matched-maturity government bond
Explanation: The G-spread (government spread) is the simple difference between a bond's yield and the yield of a benchmark government bond of similar maturity. It captures total risk premium over the risk-free rate. B describes something closer to a spread over OIS. C is a curve slope measure. D is the coupon-yield difference.
Question 673
The Z-spread (zero-volatility spread) is the constant spread added to:
Select an option first.
Correct answer: B — Every spot rate on the benchmark curve to make the bond's discounted cash flows equal to its market price
Explanation: The Z-spread is the fixed spread added to each spot rate on the benchmark curve such that discounting the bond's cash flows at those adjusted rates produces the current market price. It assumes no interest rate volatility. A and D are wrong. C describes the quoted margin on a floater.
Question 674
An upward-sloping yield curve is most consistent with which of the following market conditions?
Select an option first.
Correct answer: B — A normal economic environment with expectations of rising rates or a term premium
Explanation: Normal (upward-sloping) yield curves are typical when the economy is growing, rates are expected to rise, and/or investors demand a term premium for holding longer bonds. A would suggest a declining yield curve. C and D don't determine slope alone.
Question 675
The yield to call (YTC) of a callable bond is calculated assuming:
Select an option first.
Correct answer: B — The bond is called at the first possible call date at the stated call price
Explanation: YTC measures the return if the issuer calls the bond at the earliest call date, using the call price in place of the maturity par value. It's useful for investors who think the bond will be called. A describes YTM. C and D are incorrect.
Question 676
Which of the following bonds would have the highest interest rate risk (price sensitivity)?
Select an option first.
Correct answer: B — A 10-year bond with a 2% coupon
Explanation: Price sensitivity increases with longer maturity and lower coupon. The 10-year / 2% coupon bond has both — maximum duration. A has short maturity and high coupon. C has long maturity but high coupon (shorter duration). D has low coupon but short maturity.
Question 677
The current yield of a bond is calculated as:
Select an option first.
Correct answer: B — Annual coupon divided by the bond's current market price
Explanation: Current yield = annual coupon / current market price. It ignores capital gains or losses at maturity. A is the coupon rate (uses par, not market price). C is a component breakdown, not the definition. D is not a standard term.
Question 678
If a bond's yield to maturity decreases, what happens to the bond's price?
Select an option first.
Correct answer: B — It increases
Explanation: Bond prices and yields move inversely. When YTM falls, the bond's fixed cash flows become more valuable relative to new bonds (which yield less), so the price rises. All other options contradict the inverse price-yield relationship.
Question 679
The bootstrapping method is primarily used to:
Select an option first.
Correct answer: B — Derive spot rates from the prices of coupon-bearing bonds
Explanation: Bootstrapping extracts zero-coupon (spot) rates from the observed prices of coupon bonds by solving iteratively from the shortest maturity outward. A is a different calculation. C is duration. D involves inflation adjustment.
Question 680
A bond is said to be priced at a 'discount' when:
Select an option first.
Correct answer: C — Its coupon rate is below the market yield
Explanation: When the market demands a higher yield than the coupon offers, the bond's price falls below par (it trades at a discount). This compensates investors for the below-market coupon. A and B describe premium bonds. D describes a par bond.
Question 681
Which of the following is true about the relationship between the nominal yield and real yield of a bond?
Select an option first.
Correct answer: B — Nominal yield ≈ real yield + expected inflation
Explanation: The Fisher effect states that nominal interest rates approximately equal the real rate plus expected inflation. More precisely: (1 + nominal) = (1 + real)(1 + inflation). A and C are incorrect formulas. D is wrong.
Question 682
The market segmentation theory of the yield curve argues that:
Select an option first.
Correct answer: B — The yield curve shape is determined by supply and demand within separate maturity segments
Explanation: Market segmentation holds that different investors (insurance companies, banks, pension funds) operate in specific maturity ranges and don't substitute across them. So yield curve shape reflects supply/demand in each segment independently. A contradicts segmentation. C and D describe other theories.
Question 683
Par rates are most useful for:
Select an option first.
Correct answer: B — Determining what coupon rate a newly issued bond should carry to trade at par given current market conditions
Explanation: Par rates answer the question: 'What coupon would a bond need to be issued at par right now?' They are the rates used for setting new issue coupons. A is about inflation breakevens. C is duration analysis. D is inflation adjustment.
Question 684
The option-adjusted spread (OAS) of a bond differs from the Z-spread in that OAS:
Select an option first.
Correct answer: B — Removes the value of embedded options to isolate the credit and liquidity spread
Explanation: OAS strips out the value of any embedded options (like a call) from the Z-spread. For a callable bond, OAS < Z-spread because part of the Z-spread compensates for the call option held by the issuer. A is wrong — both use the spot curve. C is the opposite of what's true. D is wrong.
Question 685
If the yield curve shifts upward in a parallel fashion, which bond is most affected?
Select an option first.
Correct answer: B — A long-duration, low-coupon bond
Explanation: Long-duration bonds have the greatest sensitivity to parallel rate shifts. Low coupons extend duration further. Floating-rate bonds (C) reset coupons and have low duration. Callable bonds (D) have limited upside price appreciation.
Question 686
A bond's all-in price (or full price) is always greater than or equal to its flat price because:
Select an option first.
Correct answer: B — Full price includes accrued interest, which is always non-negative
Explanation: Accrued interest builds up from the last coupon date to the settlement date and is always ≥ 0. Full price = flat price + accrued interest. A, C, and D are all incorrect explanations.
Question 687
Which of the following best describes the difference between nominal yield and yield to maturity?
Select an option first.
Correct answer: B — Nominal yield is quoted annually while YTM annualizes the periodic yield based on compounding
Explanation: For a semi-annual bond, the nominal yield is often quoted as twice the semi-annual yield (bond equivalent yield). YTM can be expressed as an effective annual rate by compounding. They measure similar things but differ in convention. A is partially right but not the best answer. C reverses the logic.
Question 688
A bond pays a $50 annual coupon and has a current price of $800. What is its current yield?
Select an option first.
Correct answer: B — 6.25%
Explanation: Current yield = Annual coupon / Current price = $50 / $800 = 6.25%. A is $50/$1,000 (par, not market price). C and D are wrong.
Question 689
A 2-year zero-coupon bond has a face value of $1,000 and is priced at $907.03. What is the annual yield (spot rate) on this bond?
Select an option first.
Correct answer: B — 5.0%
Explanation: Spot rate: $907.03 × (1 + r)² = $1,000 → (1 + r)² = 1,000/907.03 = 1.1025 → 1 + r = 1.05 → r = 5.0%. A, C, D are incorrect.
Question 690
The 1-year spot rate is 3% and the 2-year spot rate is 4%. What is the implied 1-year forward rate for year 2?
Select an option first.
Correct answer: C — 5.01%
Explanation: (1.04)² = (1.03)(1 + f) → 1.0816 = 1.03(1 + f) → (1 + f) = 1.0816/1.03 = 1.0501 → f ≈ 5.01%. The forward rate must be above the 2-year spot for the average to equal 4%.
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