Fixed Income

10. Interest Rate Risk and Return practice questions

10. Interest Rate Risk and Return is part of CFA Level I Fixed Income. Fixed Income questions focus on bond cash flows, yield measures, duration, convexity, credit risk, securitization, and curve interpretation. Use this page to review the controlling ideas, then work through 6 questions with answer explanations and common traps.

Review the worked explanations before moving into adaptive practice. The app version can mix this topic with due reviews and weak related concepts.

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What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

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:

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:

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:

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:

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:

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: