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Fixed Income practice questions

Fixed Income questions focus on bond cash flows, yield measures, duration, convexity, credit risk, securitization, and curve interpretation. This section currently includes 159 public practice questions across 35 topic modules, with explanations, formulas, traps, and key takeaways.

Indicative public exam weight: 11-14%. Start with a topic guide when you need focused review, or use adaptive mode for mixed practice and due reviews.

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14. Credit Risk

7 public questions with explanations, formulas, and exam traps.

Bond Returns

1 public question with explanations, formulas, and exam traps.

Bond Valuation

5 public questions with explanations, formulas, and exam traps.

Convexity

1 public question with explanations, formulas, and exam traps.

Credit Analysis

1 public question with explanations, formulas, and exam traps.

Credit Risk

1 public question with explanations, formulas, and exam traps.

Duration

2 public questions with explanations, formulas, and exam traps.

MBS and ABS

1 public question with explanations, formulas, and exam traps.

Securitization

1 public question with explanations, formulas, and exam traps.

Term Structure

1 public question with explanations, formulas, and exam traps.

Yield Measures

3 public questions with explanations, formulas, and exam traps.

Moderate

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

An annual-coupon bond has a Macaulay duration of 5.25 years and a yield-to-maturity of 6.0% compounded semiannually. The bond's modified duration is closest to:

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Easy

Fixed Income

1. Fixed-Income Instrument Features

A fixed-income security with USD100 million par value, a 5% annual coupon paid semiannually, and maturity in 10 years is best described as having a semiannual coupon payment per USD100 of par equal to:

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Easy

Fixed Income

1. Fixed-Income Instrument Features

A bond indenture provision that limits the issuer's ability to incur additional secured borrowing is best described as:

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Easy

Fixed Income

1. Fixed-Income Instrument Features

A provision requiring an issuer to deliver audited financial statements to bondholders is best classified as a:

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Moderate

Fixed Income

1. Fixed-Income Instrument Features

Compared with a secured bond issued by the same borrower, an otherwise similar unsecured bond is most likely to have:

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Moderate

Fixed Income

1. Fixed-Income Instrument Features

An issuer wants lower refinancing risk and agrees to retire part of a bond issue periodically before final maturity. The structure is most likely a:

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Moderate

Fixed Income

1. Fixed-Income Instrument Features

Relative to an otherwise identical option-free bond, a callable bond most likely gives the:

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Easy

Fixed Income

1. Fixed-Income Instrument Features

An inflation-linked bond with principal indexed to inflation is most likely structured to protect the investor primarily against:

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Moderate

Fixed Income

10. Interest Rate Risk and Return

For a fixed-rate bond portfolio with no default risk, setting the investment horizon approximately equal to Macaulay duration is most likely intended to:

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Very Difficult

Fixed Income

10. Interest Rate Risk and Return

An investor buys a 4-year annual-pay 5.0% coupon bond at par value of 1,000 and sells it one year later for 990 immediately after receiving the first coupon. Ignoring taxes and coupon reinvestment, the one-year holding period return is closest to:

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Easy

Fixed Income

10. Interest Rate Risk and Return

The three sources of return from a fixed-rate bond held for a specified horizon are coupon income, reinvestment income, and:

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Easy

Fixed Income

10. Interest Rate Risk and Return

For a long investment horizon relative to Macaulay duration, rising yields most likely improve the investor's return through:

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Moderate

Fixed Income

10. Interest Rate Risk and Return

A bond has a Macaulay duration of 4.2 years. The investor's horizon is 4.2 years. For a small parallel yield change, the investor is most likely near the horizon at which:

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Very Difficult

Fixed Income

10. Interest Rate Risk and Return

An investor plans to hold a fixed-rate bond for two years. The bond has a Macaulay duration of six years. A sudden increase in yields is most likely to affect the investor's horizon return primarily through:

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Easy

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

Modified duration is best interpreted as a bond's approximate percentage price change for a:

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Moderate

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

A bond has a full price of 102.50 per 100 of par and a modified duration of 4.8. For 1,000 par value, the price value of a basis point is closest to:

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Very Difficult

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

Compared with a 10-year 6.0% annual coupon bond with the same yield, a 10-year zero-coupon bond most likely has:

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Easy

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

Modified duration is best interpreted as the approximate percentage price change for a:

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Easy

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

The Macaulay duration of a zero-coupon bond is equal to its:

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Moderate

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

A three-year annual-pay 4% coupon bond is priced to yield 5%. Its Macaulay duration is 2.884 years. The modified duration is closest to:

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Moderate

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

A bond has a full price of 104.00 per 100 of par and a modified duration of 6.25. The PVBP per 100 of par is closest to:

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Moderate

Fixed Income

11. Yield-Based Bond Duration Measures and Properties

A bond has a current full price of 100.75. If yields decrease by 20 bps, its price is 102.45; if yields increase by 20 bps, its price is 99.10. The approximate modified duration is closest to:

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Moderate

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

A bond has modified duration of 7.0 and convexity of 60. If its yield increases by 50 bps, the estimated percentage price change, including convexity, is closest to:

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Very Difficult

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

A portfolio contains 60 million market value of bonds with duration 5.0 and 40 million market value of bonds with duration 8.0. The portfolio duration is closest to:

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Easy

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

For an option-free bond, positive convexity means that for equal-size yield moves, the price gain when yields fall is:

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Easy

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

A callable bond near the call price is most likely to exhibit:

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Moderate

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

A bond has modified duration of 7.2 and convexity of 82. For a 40 bp increase in yield, the estimated percentage price change using duration and convexity is closest to:

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Moderate

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

A portfolio has 40% in Bond A with duration 3.0 and 60% in Bond B with duration 7.0. The portfolio duration is closest to:

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Very Difficult

Fixed Income

12. Yield-Based Bond Convexity and Portfolio Properties

A bond's current full price is 100.00. If yields decrease by 50 bps, price is 105.20; if yields increase by 50 bps, price is 95.40. Approximate convexity is closest to:

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Very Difficult

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

A callable bond is valued at 100.0. If benchmark yields decrease by 50 bps, the bond value is 103.2. If benchmark yields increase by 50 bps, the bond value is 98.6. The bond's effective duration is closest to:

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Moderate

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

Key rate duration is most appropriately used to measure a bond's sensitivity to:

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Easy

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

For a bond with an embedded option, the most appropriate interest rate risk measure is generally:

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Easy

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

Key rate duration is most useful for measuring price sensitivity to:

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Moderate

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

A bond has an effective duration of 6.1 and effective convexity of 40. For a 50 bp increase in benchmark yield, the estimated percentage price change is closest to:

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Moderate

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

Empirical duration is best described as a duration estimate based on:

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Very Difficult

Fixed Income

13. Curve-Based and Empirical Fixed-Income Risk Measures

A portfolio has key rate durations of 1.5 at the 2-year point, 3.0 at the 5-year point, and 2.0 at the 10-year point. If the 2-year key rate rises 10 bps, the 5-year key rate is unchanged, and the 10-year key rate falls 20 bps, the estimated percentage price change is closest to:

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Easy

Fixed Income

14. Credit Risk

A bond exposure is 10 million. The one-year probability of default is 2.0%, and loss given default is 40%. The expected loss over one year is closest to:

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Moderate

Fixed Income

14. Credit Risk

During a recession, credit spreads on lower-rated corporate bonds are most likely to widen because investors expect:

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Easy

Fixed Income

14. Credit Risk

Loss given default is best described as:

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Easy

Fixed Income

14. Credit Risk

A limitation of credit ratings is that they most likely:

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Moderate

Fixed Income

14. Credit Risk

A bond has a one-year probability of default of 2.0% and loss given default of 60%. The one-year expected loss is closest to:

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Moderate

Fixed Income

14. Credit Risk

If a corporate bond's credit spread widens while the benchmark yield is unchanged, the bond price will most likely:

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Very Difficult

Fixed Income

14. Credit Risk

A bond's rating is unchanged, but its spread widens after investors require more compensation for sector liquidity risk. The risk realized is best described as:

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Easy

Fixed Income

15. Credit Analysis for Government Issuers

For a sovereign issuer's local-currency debt, the credit factor most directly related to repayment capacity is the issuer's:

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Easy

Fixed Income

15. Credit Analysis for Government Issuers

Sovereign credit analysis focuses on the issuer's ability and:

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Easy

Fixed Income

15. Credit Analysis for Government Issuers

Greater monetary policy flexibility most likely strengthens a sovereign's credit profile by improving its ability to:

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Moderate

Fixed Income

15. Credit Analysis for Government Issuers

Which factor most likely indicates weaker fiscal flexibility for a sovereign issuer?

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Moderate

Fixed Income

15. Credit Analysis for Government Issuers

For a sovereign, a stronger external position is most likely indicated by:

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Very Difficult

Fixed Income

15. Credit Analysis for Government Issuers

A local government bond depends heavily on transfers from the central government and has limited independent taxing power. The credit analysis should most likely emphasize:

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Moderate

Fixed Income

16. Credit Analysis for Corporate Issuers

A company reports EBITDA of 120 million and annual interest expense of 30 million. Its EBITDA interest coverage ratio is closest to:

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Easy

Fixed Income

16. Credit Analysis for Corporate Issuers

Assuming the same corporate borrower defaults, which debt claim is generally most likely to have the highest recovery rate?

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Easy

Fixed Income

16. Credit Analysis for Corporate Issuers

A qualitative factor in corporate credit analysis is most likely:

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Easy

Fixed Income

16. Credit Analysis for Corporate Issuers

An issue rating may be higher than the issuer rating when the debt issue is:

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Moderate

Fixed Income

16. Credit Analysis for Corporate Issuers

A company has EBITDA of USD480 million, depreciation and amortization of USD60 million, and cash interest expense of USD60 million. EBITDA interest coverage is closest to:

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Moderate

Fixed Income

16. Credit Analysis for Corporate Issuers

A holding company issues debt, and its operating subsidiary has its own debt outstanding. The holding company debt is most likely exposed to:

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Very Difficult

Fixed Income

16. Credit Analysis for Corporate Issuers

A company has a senior unsecured issuer rating of BBB. It issues secured notes backed by high-quality collateral and subordinated notes with no collateral. The most accurate statement is that the:

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Easy

Fixed Income

17. Fixed-Income Securitization

In a typical securitization, the entity that purchases a pool of loans and issues securities backed by the pool is most likely the:

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Moderate

Fixed Income

17. Fixed-Income Securitization

In a securitization, subordination most likely enhances the credit quality of senior tranches by:

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Easy

Fixed Income

17. Fixed-Income Securitization

In a securitization, the entity created to hold the asset pool and issue securities is the:

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Easy

Fixed Income

17. Fixed-Income Securitization

Bankruptcy remoteness in a securitization is most likely intended to protect investors from:

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Moderate

Fixed Income

17. Fixed-Income Securitization

A securitization in which investors receive a pro rata share of cash flows from the asset pool is most likely a:

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Moderate

Fixed Income

17. Fixed-Income Securitization

In credit tranching, the tranche designed to absorb initial credit losses is the:

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Easy

Fixed Income

17. Fixed-Income Securitization

A securitization transaction has an originator, servicer, trustee, SPE, and investors. The party most directly responsible for collecting borrower payments and forwarding them according to transaction rules is the:

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Very Difficult

Fixed Income

18. Asset-Backed Security Instrument and Market Features

Compared with many typical asset-backed securities, covered bonds are most likely distinguished by investors having:

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Easy

Fixed Income

18. Asset-Backed Security Instrument and Market Features

A covered bond differs from a typical securitized ABS primarily because covered bond investors have:

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Easy

Fixed Income

18. Asset-Backed Security Instrument and Market Features

Overcollateralization is best described as credit enhancement in which:

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Moderate

Fixed Income

18. Asset-Backed Security Instrument and Market Features

Credit card receivable ABS are most likely characterized by:

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Moderate

Fixed Income

18. Asset-Backed Security Instrument and Market Features

A CDO backed by a pool of corporate bonds most directly reallocates credit risk through:

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Easy

Fixed Income

18. Asset-Backed Security Instrument and Market Features

A securitization uses subordination, a reserve account, and excess spread. These features are best classified as:

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Easy

Fixed Income

19. Mortgage-Backed Security Instrument and Market Features

When mortgage rates decline sharply, investors in residential mortgage pass-through securities are most likely exposed to increased:

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Easy

Fixed Income

19. Mortgage-Backed Security Instrument and Market Features

Contraction risk in an RMBS is the risk that principal is repaid:

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Easy

Fixed Income

19. Mortgage-Backed Security Instrument and Market Features

Compared with RMBS, CMBS loans most likely have greater contractual protection against prepayment through:

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Moderate

Fixed Income

19. Mortgage-Backed Security Instrument and Market Features

For a mortgage pass-through security, unscheduled principal prepayments most likely cause investors to receive principal:

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Moderate

Fixed Income

19. Mortgage-Backed Security Instrument and Market Features

In a sequential-pay CMO, principal payments are generally distributed first to the:

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Very Difficult

Fixed Income

19. Mortgage-Backed Security Instrument and Market Features

A PAC tranche in a CMO has a support tranche. If prepayments are within the planned range, the PAC tranche most likely has:

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Easy

Fixed Income

2. Fixed-Income Cash Flows and Types

A bond that repays portions of principal during its life rather than repaying all principal at maturity is most likely:

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Very Difficult

Fixed Income

2. Fixed-Income Cash Flows and Types

A company issues a 10-year bond that it may redeem at par after year 4 if market yields decline. The provision is most likely:

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Easy

Fixed Income

2. Fixed-Income Cash Flows and Types

A bond that pays periodic interest and repays the entire principal amount at maturity is best described as a:

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Easy

Fixed Income

2. Fixed-Income Cash Flows and Types

A payment-in-kind bond is best described as a bond that allows interest to be paid by:

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Moderate

Fixed Income

2. Fixed-Income Cash Flows and Types

A floating-rate note pays three-month MRR + 80 bps, subject to a cap of 6.00% and a floor of 2.00%. If MRR is 5.50% on the reset date, the annualized coupon rate for the next period is closest to:

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Moderate

Fixed Income

2. Fixed-Income Cash Flows and Types

An investor buys a fixed-rate bond at 98 and sells it one year later at 101 after receiving a coupon of 5. The one-year holding period return is closest to:

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Very Difficult

Fixed Income

2. Fixed-Income Cash Flows and Types

For a fixed-rate bond, a holding period shorter than Macaulay duration is most likely dominated by exposure to:

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Easy

Fixed Income

3. Fixed-Income Issuance and Trading

A dealer purchases an entire new corporate bond issue from the issuer and resells the bonds to investors. This transaction is best described as:

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Moderate

Fixed Income

3. Fixed-Income Issuance and Trading

A fixed-income index is most likely to have higher exposure to issuers with the greatest amount of debt outstanding when the index uses:

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Easy

Fixed Income

3. Fixed-Income Issuance and Trading

A newly issued bond sold by an underwriter to investors is issued in the:

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Easy

Fixed Income

3. Fixed-Income Issuance and Trading

A major limitation of a market-value-weighted fixed-income index is that issuers with the largest index weights are often those with the:

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Moderate

Fixed Income

3. Fixed-Income Issuance and Trading

A bond is quoted at a clean price of 99.40. Accrued interest is 1.35 per 100 of par. The full price is closest to:

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Moderate

Fixed Income

3. Fixed-Income Issuance and Trading

A dealer quotes a bond bid of 98.70 and ask of 99.10. The bid-ask spread per 100 of par is closest to:

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Easy

Fixed Income

3. Fixed-Income Issuance and Trading

An analyst estimates the yield of an infrequently traded bond by comparing it with recently traded bonds of similar maturity, coupon, and credit quality. The method is best described as:

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Easy

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

A large corporation seeking unsecured short-term financing for seasonal working capital needs is most likely to issue:

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Moderate

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

In a repurchase agreement, increasing the haircut on the collateral most directly reduces credit exposure for the:

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Easy

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

For a highly rated corporation seeking short-term unsecured funding, the instrument most likely used is:

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Easy

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

Compared with unsecured debt, secured debt most likely has a claim supported by:

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Moderate

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

In a repo, securities worth EUR10.0 million are used as collateral with a 3% haircut. The cash lent at initiation is closest to:

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Moderate

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

Relative to investment-grade issuers, high-yield corporate issuers most likely have:

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Very Difficult

Fixed Income

4. Fixed-Income Markets for Corporate Issuers

In a repo transaction, the cash lender's exposure after receiving collateral is best described as being reduced primarily by:

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Easy

Fixed Income

5. Fixed-Income Markets for Government Issuers

The feature that most clearly distinguishes a sovereign government issuer from a non-sovereign government issuer is the sovereign issuer's ability to:

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Moderate

Fixed Income

5. Fixed-Income Markets for Government Issuers

Sovereign government bonds are often used as benchmark securities primarily because they are most likely to be:

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Easy

Fixed Income

5. Fixed-Income Markets for Government Issuers

A bond issued by an international institution owned by multiple national governments is best classified as debt of a:

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Easy

Fixed Income

5. Fixed-Income Markets for Government Issuers

A short-term sovereign obligation issued at a discount and maturing in less than one year is most likely a:

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Moderate

Fixed Income

5. Fixed-Income Markets for Government Issuers

A sovereign has debt outstanding in a currency it cannot issue. The incremental risk most likely emphasized by credit analysts is:

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Moderate

Fixed Income

5. Fixed-Income Markets for Government Issuers

In a government bond auction, a competitive bidder most likely specifies the:

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Very Difficult

Fixed Income

5. Fixed-Income Markets for Government Issuers

Two bonds are issued by the same sovereign. Bond X is denominated in the sovereign's local currency, and Bond Y is denominated in a foreign currency. The bond with lower default risk from the issuer's currency flexibility is most likely:

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Moderate

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A 5-year annual-pay bond has a 4.0% coupon, a yield to maturity of 5.0%, and a par value of 1,000. The bond's price is closest to:

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Very Difficult

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A semiannual-pay bond has a 6.0% annual coupon and a full price of 101.20 per 100 of par. The last coupon was paid two months ago, and the next coupon will be paid four months from now. Using a straight-line accrual convention, the bond's flat price per 100 of par is closest to:

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Easy

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A fixed-rate bond with a coupon rate below its yield to maturity is most likely trading:

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Very Difficult

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

An analyst estimates the required yield on an illiquid 4-year A-rated utility bond by interpolating yields from actively traded 3-year and 5-year A-rated utility bonds. The analyst's method is best described as:

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Easy

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A fixed-rate bond with a coupon rate below its yield-to-maturity will most likely trade at:

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Easy

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

For a premium fixed-rate bond with no change in yield-to-maturity, the price as maturity approaches is most likely to:

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Moderate

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A five-year, 6% annual coupon bond pays semiannually and has a yield-to-maturity of 7%. Per 100 of par, its price is closest to:

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Moderate

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A semiannual-pay bond has a coupon rate of 6% and 183 days in the coupon period. Settlement occurs 73 days after the last coupon date. Accrued interest per 100 of par is closest to:

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Easy

Fixed Income

6. Fixed-Income Bond Valuation: Prices and Yields

A bond's full price is 101.20, accrued interest is 1.65, and par value is 100. The clean price is closest to:

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Moderate

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

A bond has a stated annual yield of 6.0% compounded semiannually. The effective annual yield is closest to:

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Very Difficult

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

A 7-year corporate bond has a yield to maturity of 5.80%. The interpolated 7-year government benchmark yield is 4.25%. The corporate bond's G-spread is closest to:

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Moderate

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

A bond with a par value of 100 pays a 6.0% annual coupon and is priced at 95.00. The bond's current yield is closest to:

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Easy

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

The current yield of a fixed-rate bond is best calculated as annual coupon divided by:

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Easy

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

For a callable bond with several possible call dates, yield-to-worst is best described as the:

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Moderate

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

A bond pays a 5% coupon semiannually, is priced at 102, and is callable in three years at 101. The bond's yield-to-call is closest to:

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Moderate

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

A bond has a stated annual yield of 5.80% compounded semiannually. The effective annual yield is closest to:

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Easy

Fixed Income

7. Yield and Yield Spread Measures for Fixed-Rate Bonds

A corporate bond has a 4.30% yield-to-maturity. The interpolated government benchmark yield at the same maturity is 3.55%. The G-spread is closest to:

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Easy

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

A floating-rate note's quoted margin is 50 bps, but investors now require a discount margin of 90 bps for similar risk. The note is most likely priced:

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Moderate

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

A 180-day Treasury bill with a face value of 1,000,000 is priced at 985,000. Using a 360-day year, the discount-basis yield is closest to:

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Easy

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

In a floating-rate note, the quoted margin is best described as the spread:

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Easy

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

Immediately after a reset date, an otherwise plain floating-rate note will trade closest to par when its quoted margin is equal to its:

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Moderate

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

A floating-rate note's quoted margin is 80 bps and the market-required margin has increased to 110 bps. All else equal, the FRN is most likely to trade:

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Moderate

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

A 180-day Treasury bill with face value USD1,000,000 is quoted on a 360-day bank discount basis at 3.60%. The purchase price is closest to:

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Moderate

Fixed Income

8. Yield and Yield Spread Measures for Floating-Rate Instruments

A 90-day money market instrument is purchased for 99.20 per 100 of face value and pays 100 at maturity. On a 365-day add-on basis, the yield is closest to:

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Very Difficult

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

The 1-year spot rate is 3.00%, and the 2-year annual spot rate is 4.00%. Assuming annual compounding, the 1-year forward rate beginning one year from today is closest to:

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Moderate

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

A 2-year annual-pay bond has a 5.0% coupon and par value of 1,000. The 1-year spot rate is 4.0%, and the 2-year spot rate is 5.0%. The bond's price is closest to:

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Very Difficult

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

The 1-year spot rate is 3.0%, and the 2-year spot rate is 4.0%, both with annual compounding. The 2-year annual par coupon rate for a bond priced at 100 is closest to:

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Easy

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

A spot rate is best described as the yield used to discount:

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Easy

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

When the forward curve is above the current spot curve, the market-implied future short rates are most likely:

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Moderate

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

A three-year annual-pay 5% bond is valued using spot rates of 2.00%, 2.50%, and 3.00%. Per 100 of par, the price is closest to:

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Moderate

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

The one-year spot rate is 2.00%, and the two-year spot rate is 2.60%. The one-year forward rate one year from now is closest to:

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Very Difficult

Fixed Income

9. The Term Structure of Interest Rates: Spot, Par, and Forward Curves

Given annual spot rates of 1.00%, 1.50%, and 2.00%, the three-year annual par coupon rate is closest to:

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Moderate

Fixed Income

Bond Returns

An investor buys a bond for USD980, receives a USD30 coupon after six months and reinvests it for six months at a periodic rate of 1.0%, receives another USD30 coupon at year-end, and sells the bond for USD1,005. The one-year holding period return is closest to:

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Moderate

Fixed Income

Bond Valuation

A 5-year bond with face value USD1,000 pays a 6% annual coupon semiannually. Its yield to maturity is 7% compounded semiannually. The full price on a coupon date is closest to:

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Moderate

Fixed Income

Bond Valuation

A 7-year bond pays a 5% annual coupon semiannually and is priced at 94.25 per 100 of par on a coupon date. The annualized yield to maturity with semiannual compounding is closest to:

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Moderate

Fixed Income

Bond Valuation

A bond with face value USD1,000 pays a 6% coupon semiannually. The last coupon was paid 110 days ago, and there are 180 days in the coupon period. The quoted flat price is USD1,012.40. The full price is closest to:

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Moderate

Fixed Income

Bond Valuation

Two option-free bonds have the same maturity and yield. Bond X has a 3% coupon and Bond Y has a 7% coupon. The current yield is below the YTM for X and above the YTM for Y. The bonds are most likely trading, respectively, at:

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Moderate

Fixed Income

Bond Valuation

An illiquid 4-year 4.8% corporate bond with no recent trades is valued using yields on traded bonds of similar credit quality and maturities of 3 and 5 years. This valuation method is best described as:

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Moderate

Fixed Income

Cash Flows and Types

A bond allows the issuer to redeem the bond before maturity when rates fall, while another bond allows the investor to sell the bond back to the issuer at par after three years. The first and second provisions most likely:

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Moderate

Fixed Income

Cash Flows and Types

A floating-rate note pays three-month reference rate plus 120 bps, resets quarterly, and currently trades at par immediately after reset. If market required margin for this issuer rises to 170 bps before the next reset, the note will most likely trade:

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Moderate

Fixed Income

Convexity

A bond has modified duration of 6.80 and convexity of 58.0. If its yield rises by 75 bps, the approximate percentage price change is closest to:

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Moderate

Fixed Income

Corporate, Government, and Money Market Instruments

A securities dealer obtains overnight funding by selling government securities to a cash investor and agreeing to repurchase them tomorrow at a higher price. For the dealer, the transaction is best described as:

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Moderate

Fixed Income

Credit Analysis

In a bankruptcy waterfall, a secured senior bond and an unsecured senior bond of the same issuer have identical maturities. The secured senior bond most likely has:

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Moderate

Fixed Income

Credit Risk

A lender has a USD10 million exposure to a borrower. The one-year probability of default is 2.5%, and the expected recovery rate conditional on default is 45%. Expected credit loss is closest to:

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Moderate

Fixed Income

Duration

A 3-year bond with face value 100 pays a 4% annual coupon and yields 5% annually. Its Macaulay duration is closest to:

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Moderate

Fixed Income

Duration

A bond has Macaulay duration of 7.20 years, YTM of 6.00% compounded semiannually, full price of 98.40 per 100 par, and no embedded options. Its modified duration and PVBP per 100 par are closest to:

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Moderate

Fixed Income

Effective Duration

A callable bond is priced at 100.50. If the benchmark curve shifts down 50 bps, the price is 104.90; if the curve shifts up 50 bps, the price is 96.80. The effective duration is closest to:

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Moderate

Fixed Income

Instrument Features

A bond indenture requires the issuer to maintain insurance on pledged collateral and limits additional debt if debt/EBITDA exceeds 4.0x. These provisions are best classified, respectively, as:

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Moderate

Fixed Income

MBS and ABS

Mortgage rates fall sharply after a collateralized mortgage obligation is issued. For a planned amortization class tranche, the main risk support tranches are designed to absorb first is most likely:

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Moderate

Fixed Income

Money Market Yield Measures

A 180-day Treasury bill with face value USD1,000,000 is purchased for USD970,000. Using a 360-day year, the discount basis yield is closest to:

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Moderate

Fixed Income

Portfolio Duration

A fixed-income portfolio contains three positions with market values of USD20 million, USD35 million, and USD45 million and durations of 2.1, 5.4, and 7.2. The portfolio duration is closest to:

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Moderate

Fixed Income

Securitization

A bank issues covered bonds backed by mortgage loans that remain on its balance sheet. Investors have recourse to both the cover pool and the issuing bank. This structure differs from a typical ABS primarily because:

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Moderate

Fixed Income

Term Structure

The 1-year spot rate is 3.00%, and the 2-year spot rate is 4.20%, both annual effective rates. The 1-year forward rate beginning one year from today is closest to:

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Moderate

Fixed Income

Yield Measures

An annual stated yield is quoted at 5.60% with quarterly compounding. The effective annual yield is closest to:

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Moderate

Fixed Income

Yield Measures

A premium bond is callable in 3 years at 100. It has 8 years to maturity, a 7% annual coupon paid semiannually, and a current price of 104 per 100 of par. The YTM is 6.35% and the yield-to-call is 5.53%. The yield-to-worst is:

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Moderate

Fixed Income

Yield Measures

An option-free corporate bond has a YTM of 6.20%, and a maturity-matched government bond yields 4.85%. The corporate bond's G-spread is closest to:

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