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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 901
The spread between a BBB-rated corporate bond and a AAA-rated government bond is primarily compensation for:
Select an option first.
Correct answer: C — Credit risk and liquidity risk
Explanation: Corporate bond spreads over government bonds compensate investors mainly for credit risk (higher default probability and loss given default) and liquidity risk (harder to sell quickly at fair value). A is captured by duration/modified duration. B is too narrow. D is a separate risk measure.
Question 902
Which of the following bond types has the most predictable cash flows?
Select an option first.
Correct answer: C — An option-free bullet bond
Explanation: An option-free bullet bond pays fixed coupons and returns principal at a known maturity — completely predictable cash flows. A has prepayment risk. B has call risk. D has variable coupons (although principal is fixed).
Question 903
A bond investor wants maximum protection against rising interest rates. Which portfolio characteristic is most desirable?
Select an option first.
Correct answer: B — Low duration, high convexity
Explanation: Low duration reduces price sensitivity to rising rates (minimizes loss). High convexity adds an additional benefit (losses are smaller than duration alone predicts). B is optimal for rising rate protection. A maximizes losses. C gives conflicting signals. D misses convexity benefit.
Question 904
Which of the following bond positions would you short if you expected credit spreads to widen significantly?
Select an option first.
Correct answer: B — Long-duration corporate bonds
Explanation: Credit spread widening hurts corporate bond prices most — especially long-duration ones (more price sensitivity). Shorting long-duration corporate bonds profits when their prices fall due to spread widening. A, C, D are not exposed to credit spread widening in the same way.
Question 905
A CMO tranche that receives principal payments first is called a:
Select an option first.
Correct answer: C — Sequential-pay first tranche
Explanation: In a sequential-pay CMO, the first tranche (A-tranche or sequential-pay first) receives all principal payments until it is fully retired, then subsequent tranches begin receiving principal. Z-tranches receive no cash until prior tranches are paid. IO strips receive only interest. Mezzanine is a credit tier.
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Question 906
Which of the following correctly describes the effect of positive convexity on bond returns when yields are volatile?
Select an option first.
Correct answer: C — It benefits returns by making price gains larger than price losses for equal yield moves
Explanation: Positive convexity creates a favorable asymmetry: when yields fall, price gains exceed duration predictions; when yields rise, price losses are less than duration predictions. This asymmetry benefits investors regardless of yield direction. A, B, D are wrong.
Question 907
In a pass-through MBS, if prepayments increase beyond expectations, the investor's realized return will most likely:
Select an option first.
Correct answer: B — Decrease because the investor must reinvest principal at lower prevailing rates
Explanation: Accelerated prepayments return principal faster, forcing the investor to reinvest at current (lower) rates — this is contraction risk. The investor loses the benefit of the high-yielding instrument. A is wrong. C is wrong (no guarantee). D is wrong.
Question 908
A portfolio manager benchmarks against an index with duration 6. Her portfolio has duration 4. She is most exposed to:
Select an option first.
Correct answer: A — Losses when rates fall
Explanation: Being short duration relative to the benchmark means her portfolio will underperform when rates fall (the benchmark gains more from falling rates than her portfolio). B: her portfolio would outperform if rates rise (less loss). C and D are separate risks.
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