Test On Fixed Income For CFA Level 1

20 Questions  I  By Daulatguru
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CFA Quizzes & Trivia
There are 20 questions in this test from the Fixed Income section of the CFA Level 1 syllabus. You will get 30 minutes to complete the test.

  
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  • 1. 
    Which of the following is true about a bond with a deferred call provision?
    • A. 

      It could be called at any time during the tenure of the bond

    • B. 

      Principal repayment can be deferred until it reaches maturity

    • C. 

      It could not be called right after the date of issue


  • 2. 
    All other things being equal, which one of the following bonds has the greatest volatility?
    • A. 

      10-year, 15% coupon

    • B. 

      10-year, 10% coupon

    • C. 

      3-year, 10% coupon


  • 3. 
    What is the worst-case profitability scenario for an investor who sold a call on the firm's stock for a premium of $10 and a strike price of $100?
    • A. 

      $90 per share profit

    • B. 

      $0 per share profit (break-even)

    • C. 

      Unlimited losses


  • 4. 
    One of the most commonly used yield spread measures is the nominal spread. Which of the following is least likely a limitation of nominal spread? The nominal spread assumes:
    • A. 

      An upward sloping yield curve

    • B. 

      All cash payments will be received in a prompt and timely manner

    • C. 

      All cash flows can be discounted at the same rate


  • 5. 
    Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price?
    • A. 

      The value of two shares of stock

    • B. 

      The value of one share of stock plus the exercise price

    • C. 

      The exercise price


  • 6. 
    Which of the following statement is least accurate?
    • A. 

      A Conventional mortgage is an example of an amortizing loan

    • B. 

      Call provisions give the issuer the right and the obligation to retire all or a part of an issue prior to maturity

    • C. 

      Sinking fund provisions provide for the repayment of principal through a series of payments over the life of the issue


  • 7. 
    Which of the following statement is incorrect ?
    • A. 

      Accrued interest is the interest earned since the last coupon payment date and is paid by a bond buyer to a bond seller

    • B. 

      Clean price is the quoted price of the bond without accrued interest

    • C. 

      Full price refers to the quoted price without any accrued interest


  • 8. 
    An FRA settles in 30 days:- • $1 million notional • Based on 90-day LIBOR • Forward rate of 6% • Actual 90-day LIBOR at settlement is 6.5% Calculate the PV of the FRA
    • A. 

      $1,000

    • B. 

      $1,203

    • C. 

      $1,230


  • 9. 
    Suppose that a corporate bond and a government bond have equivalent characteristics. They both have a coupon rate of 10% paid annually and have two years remaining to maturity. Assuming a flat government term structure of 15% which of the following is a possible price of the corporate bond?
    • A. 

      91.87

    • B. 

      83.17

    • C. 

      91.35


  • 10. 
    A firm has just issued $1,000 face value bonds with a coupon rate of 8%, paid semi-annually, and a maturity of 15 years. If the issue price for this bond is $785.50, what is the yield-to-maturity, stated annually?
    • A. 

      9.872 percent

    • B. 

      10.365 percent

    • C. 

      10.942 percent


  • 11. 
    When computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the:
    • A. 

      Yield to maturity at the time of the investment

    • B. 

      Prevailing yield to maturity at the time interest payments are received

    • C. 

      Coupon rate


  • 12. 
    Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest annually. There are 2 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10%? Use simple compounding.
    • A. 

      0.1

    • B. 

      0.0738

    • C. 

      0.05


  • 13. 
    Ghanshyam group’s economics department has forecast that interest rates are going to change by 70 basis points. Vijay, a fixed-coupon bond portfolio manager with asset value of $120.00 million at Ghanshyam Group, forecasts that the portfolio’s value will increase by $2.2 million if interest rates fall and will decrease by $2.0 million if interest rates rise. Which of the following choices is closest to the portfolio’s effective duration?
    • A. 

      4.3

    • B. 

      3.6

    • C. 

      3.50


  • 14. 
    What bond type does the following price-yield curve represent and at which yield level is convexity equal to zero?
    • A. 

      Callable bond with convexity close to zero at y2

    • B. 

      Callable bond with convexity close to zero at y1 and y3

    • C. 

      Puttable bond with convexity close to zero at y2


  • 15. 
    Which of the following five year bonds has the lowest interest rate sensitivity?
    • A. 

      Floating rate bond

    • B. 

      Option-free 5% coupon bond

    • C. 

      Zero-coupon bond


  • 16. 
    A zero-coupon bond with a maturity of 10 years has an annual effective yield of 10%. What is the closest value for its modified duration?
    • A. 

      10

    • B. 

      100

    • C. 

      9


  • 17. 
    With any other factors remaining unchanged, which of the following statements regarding bonds is not valid?
    • A. 

      The price of a callable bond increases when interest rates increase

    • B. 

      Issuance of a callable bond is equivalent to a short position in a straight bond plus a long call option on the bond price

    • C. 

      The put feature in a puttable bond lowers its yield compared with the yield of an equivalent straight bond


  • 18. 
    A newly issued 8% bond that pays semiannual coupons has principal value of $1,000 with a bond life of 1 year and a yield of 6% per year. The Macaulay Duration of the bond is 0.9809 and convexity is 1.3780. If the yield changes from 6% to 6.5%, then the statement that best describes the actual bond price change is:
    • A. 

      Bond's actual price change is -4.83 and predicted price change according to formula that adjusts for both convexity and duration is -4.73

    • B. 

      Bond's actual price change is -5.052996 and predicted price change according to a formula that adjusts for both convexity and duration is -4.85

    • C. 

      Bond's actual price change is -4.83 and predicted price change according to a formula that adjusts for both convexity and duration is -4.83


  • 19. 
    Of the following bonds, which one will suffer the largest proportional price increase after a decrease in interest rates of 10 basis points? Assume the annual yield is 7%.
    • A. 

      A zero-coupon bond maturing in 5 years

    • B. 

      A coupon-paying bond, with Macaulay Duration of 3.81 years and convexity of 16.39 years squared

    • C. 

      A bond with a coupon of 10% maturing in 10 years that is immediately callable


  • 20. 
    A 10-year, 8% coupon bond currently sells for $90. A 10-year, 4% coupon bond current 1 sells for $80. What is the 10-year zero rate?
    • A. 

      5.7%

    • B. 

      6.4%

    • C. 

      3.57%


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