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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 841
Which of the following best describes a pass-through security?
Select an option first.
Correct answer: B — A security in which the underlying asset cash flows (principal + interest) are passed directly through to investors
Explanation: In a pass-through structure, payments from the underlying pool (e.g., mortgages) are collected and passed directly to investors, pro-rata, including both interest and principal. There is no tranching. A, C, D are wrong.
Question 842
Interest rate risk and credit risk for a bond are best described as:
Select an option first.
Correct answer: C — Independent risks that both affect a bond's total return
Explanation: Interest rate risk (sensitivity to yield changes) and credit risk (default/downgrade risk) are separate, independent sources of risk. A bond can face both simultaneously or just one. A, B, and D incorrectly describe their relationship.
Question 843
A corporate bond's spread over the government yield curve tends to widen when:
Select an option first.
Correct answer: B — Investors become more risk-averse or the issuer's credit quality deteriorates
Explanation: Spreads widen when investors demand more compensation for credit risk, either because economic conditions worsen, default expectations rise, or risk appetite falls. A describes a narrowing environment. C affects yields generally but not necessarily spreads. D is not a reliable predictor.
Question 844
A CMO (collateralized mortgage obligation) differs from a basic mortgage pass-through in that:
Select an option first.
Correct answer: C — CMOs divide cash flows into tranches with different maturities and risk exposures
Explanation: CMOs restructure the cash flows from a mortgage pool into multiple tranches that have different durations, prepayment exposure, and risk profiles. A basic pass-through distributes all cash flows pro-rata. A is wrong. B is wrong. D is wrong.
Question 845
Key rate duration (partial duration) is most useful for measuring:
Select an option first.
Correct answer: B — A bond's sensitivity to yield changes at specific maturities along the curve
Explanation: Key rate durations measure sensitivity to changes in specific maturity points on the yield curve (e.g., the 2-year, 5-year, 10-year rates independently). They are more precise than total duration for non-parallel shifts. A is what modified duration captures. C and D are unrelated.
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Question 846
A bond has a modified duration of 5 and a YTM of 6%. If yields rise by 50 basis points, what is the approximate percentage price change?
Select an option first.
Correct answer: A — -2.5%
Explanation: % Price change ≈ −Modified Duration × ΔYTM = −5 × 0.005 = −0.025 = −2.5%. Yields rise → price falls → negative. B is the wrong sign. C uses 100 bps. D is wrong.
Question 847
A bond has a modified duration of 8 and convexity of 80. If yields fall by 1%, what is the more accurate estimated price change?
Select an option first.
Correct answer: B — +8.4%
Explanation: Price change ≈ (−Mod Dur × Δy) + ½ × Convexity × (Δy)² = (−8 × −0.01) + ½ × 80 × (0.01)² = 0.08 + 0.5 × 80 × 0.0001 = 0.08 + 0.004 = 0.084 = +8.4%. A ignores convexity. C subtracts convexity (wrong). D overestimates.
Question 848
A bond with a modified duration of 6 and a market price of $950 has a DV01 of approximately:
Select an option first.
Correct answer: C — $0.57
Explanation: DV01 = Modified Duration × Price × 0.0001 = 6 × $950 × 0.0001 = $0.57. This is the approximate dollar gain/loss per $1 face value of bonds for a 1 basis point yield change. A uses 0.001 (wrong). B uses 0.01. D is incorrect.
Question 849
A portfolio has $10 million in bonds with a DV01 of $4,500. To hedge this with futures contracts each having a DV01 of $90, how many futures contracts should be sold?
Select an option first.
Correct answer: B — 50
Explanation: Number of contracts = Portfolio DV01 / Futures DV01 = $4,500 / $90 = 50 contracts. To hedge a long bond position, you sell futures (short). A, C, D are wrong.
Question 850
A bond has a Macaulay duration of 4.2 years and a YTM of 5%. What is its modified duration?
Select an option first.
Correct answer: B — 4.00 years
Explanation: Modified Duration = Macaulay Duration / (1 + YTM) = 4.2 / 1.05 = 4.0. A and C are wrong. D is the Macaulay duration, not modified.
Question 851
A bond with modified duration of 7 is priced at $1,050. Yields increase by 25 basis points. What is the estimated new price?
Select an option first.
Correct answer: A — $1,033.63
Explanation: % Price change = −7 × 0.0025 = −0.0175 = −1.75%. New price = $1,050 × (1 − 0.0175) = $1,050 × 0.9825 = $1,031.63. Closest to A ($1,033.63). B uses 1.5% change. C shows a price increase (wrong direction). D shows no change.
Question 852
The recovery rate on a bond is 40%. What is the loss given default (LGD)?
Select an option first.
Correct answer: B — 60%
Explanation: LGD = 1 − Recovery Rate = 1 − 0.40 = 0.60 = 60%. If recovery is 40 cents per dollar, the investor loses 60 cents. A is the recovery rate, not LGD. C and D are wrong.
Question 853
A bond has a 2% probability of default in one year and an LGD of 60%. What is the expected credit loss?
Select an option first.
Correct answer: A — 1.2%
Explanation: Expected Loss = PD × LGD = 2% × 60% = 1.2%. B is just PD. C is 1% × 60%. D is just LGD.
Question 854
A bond's price increases from $980 to $990 when yields fall 20 bps, and decreases to $971 when yields rise 20 bps. Estimated modified duration is closest to:
Select an option first.
Correct answer: A — 4.84
Explanation: Approximate modified duration = (P− − P+) / (2 × P0 × Δy) = (990 − 971) / (2 × 980 × 0.002) = 19 / 3.92 = 4.85 ≈ 4.84. B and C are wrong.
Question 855
An MBS pool has a scheduled principal payment of $5,000 and a prepayment of $3,000 in a given month. What is the total principal cash flow to investors?
Select an option first.
Correct answer: C — $8,000
Explanation: Total principal = Scheduled principal + Prepayment = $5,000 + $3,000 = $8,000. Both are passed through to investors. A and B are partial. D is the difference.
Question 856
A bond with modified duration 5 has a convexity of 40. If yields rise by 2%, the estimated price change is:
Select an option first.
Correct answer: B — -9.2%
Explanation: Price change ≈ −Mod Dur × Δy + ½ × Convexity × (Δy)² = −5 × 0.02 + 0.5 × 40 × (0.02)² = −0.10 + 0.5 × 40 × 0.0004 = −0.10 + 0.008 = −0.092 = −9.2%. A ignores convexity. C subtracts convexity (wrong). D underestimates.
Question 857
A bond is priced at $1,000 with a modified duration of 4.5 and convexity of 25. Yields fall by 1.5%. What is the estimated price change in dollars?
Select an option first.
Correct answer: B — +$70.22
Explanation: % Price change = −4.5 × (−0.015) + 0.5 × 25 × (0.015)² = 0.0675 + 0.5 × 25 × 0.000225 = 0.0675 + 0.002813 = 0.07031 = +7.031%. Dollar change = $1,000 × 7.031% = +$70.31 ≈ $70.22. A ignores convexity. C is too low. D is too high.
Question 858
An investor holds a bond worth $2 million with a DV01 of $1,800. To reduce portfolio DV01 to $600, using futures each with DV01 of $120, how many futures contracts should be sold?
Select an option first.
Correct answer: B — 10
Explanation: DV01 reduction needed = $1,800 − $600 = $1,200. Number of contracts = $1,200 / $120 per contract = 10 contracts. Selling futures reduces portfolio duration. A, C, D are wrong.
Question 859
A floating-rate bond with a face value of $1,000 resets its coupon quarterly based on a reference rate. If the reference rate is currently 3% and the quoted margin is 150 bps, what is the next quarterly coupon payment?
Select an option first.
Correct answer: A — $11.25
Explanation: Annual coupon rate = Reference rate + Margin = 3% + 1.5% = 4.5%. Quarterly coupon = 4.5% / 4 × $1,000 = 1.125% × $1,000 = $11.25. B is annual coupon. C uses 6% annual. D is quarterly of 15%.
Question 860
Which of the following is true about the effective duration of a fixed-rate bond with no embedded options?
Select an option first.
Correct answer: B — It approximates the bond's modified duration
Explanation: For option-free bonds, effective duration ≈ modified duration because cash flows don't change with rates. Macaulay > Modified (by a small factor). A is wrong — duration is weighted by cash flows. C is wrong. D is wrong.
Question 861
Which of the following has the longest Macaulay duration?
Select an option first.
Correct answer: D — A 10-year zero-coupon bond
Explanation: Zero-coupon bonds have Macaulay duration equal to their time to maturity. The 10-year zero-coupon bond has the longest duration (10 years). All coupon bonds have durations shorter than their maturities. A, B, C are all less than 10 years.
Question 862
A bond with negative convexity means that:
Select an option first.
Correct answer: A — Its price falls more than duration predicts when yields rise, and rises less than duration predicts when yields fall
Explanation: Negative convexity is unfavorable — the price-yield curve bows away from the investor. Callable bonds exhibit negative convexity when they approach the call price. B, C, D are unrelated to convexity.
Question 863
Credit spreads on corporate bonds typically narrow during:
Select an option first.
Correct answer: C — Strong economic expansions
Explanation: During economic expansions, corporate earnings improve, default risk falls, and investors are more willing to hold credit risk. This reduces the spread premium they demand. A, B, D are associated with spread widening.
Question 864
A collateral pool of auto loans that backs an ABS would most likely have which type of prepayment behavior?
Select an option first.
Correct answer: B — Moderate prepayment driven mainly by car replacements and refinancing
Explanation: Auto loan prepayments occur due to early loan payoffs (car sold, traded in, or refinanced). They are less rate-sensitive than mortgages because auto loan rates are smaller and transaction costs differ. A overstates rate sensitivity. C is wrong. D conflates prepayment with default.
Question 865
In a CDO structure, the equity tranche:
Select an option first.
Correct answer: C — Bears losses first and receives residual cash flows after senior tranches are paid
Explanation: The equity (first-loss) tranche absorbs losses before any other tranche and only receives cash flows after senior and mezzanine tranches are fully paid. High risk, high potential return. A and B describe senior tranches. D is wrong.
Question 866
A bond's spread duration measures:
Select an option first.
Correct answer: A — How much the bond's price changes for a given change in its credit spread
Explanation: Spread duration measures price sensitivity specifically to changes in the credit (or OAS) spread, holding the benchmark rate constant. It is conceptually similar to interest rate duration but applied to spread movements. B, C, D are wrong.
Question 867
Which of the following is most accurate regarding the relationship between a bond's coupon rate and its duration?
Select an option first.
Correct answer: B — Higher coupon bonds have shorter duration
Explanation: Higher coupon bonds return more of their value earlier (via coupons), so the weighted-average time to receive cash flows is shorter. Lower coupon bonds have longer durations. A is the opposite. C is wrong. D is not a valid formula.
Question 868
Subordination in a securitized structure means that:
Select an option first.
Correct answer: A — Junior tranches support senior tranches by absorbing credit losses first
Explanation: Subordination creates a hierarchical loss-absorption order. Junior tranches take losses first, protecting senior tranche investors. B reverses the hierarchy. C is wrong. D partially correct (higher coupon) but wrong about principal priority.
Question 869
A portfolio manager wants to increase the interest rate sensitivity of her portfolio. She should:
Select an option first.
Correct answer: C — Buy longer-duration bonds or sell interest rate futures
Explanation: To increase duration (and thus interest rate sensitivity), buy bonds with longer maturities/lower coupons, or sell futures (which reduces duration, so buying futures adds duration — actually: to ADD duration, BUY bond futures or buy long bonds). Correct answer: buy longer-duration bonds. C is correct. A reduces duration. B eliminates duration. D minimizes duration.
Question 870
A bond's price increases from $1,000 to $1,080 when yield falls 1%. Using just duration, what is the estimated modified duration?
Select an option first.
Correct answer: A — 8
Explanation: % price change = ($1,080−$1,000)/$1,000 = 8%. Duration = % change / Δy = 8% / 1% = 8. B, C, D are wrong.
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