CFA LEVEL 1 - FIXED INCOME EXAM ACTUAL QUESTIONS
& ANSWERS | FROM QUESTION TO PERFECTION| STUDY
WITH CONFIDENCE!
Contract that specifies all the rights and obligations of the issuer and owners of a fixed income
security. Answer: Bond Indenture
Prohibitions on the borrower. Answer: Negative Covenants
Actions that the borrower promises to perform. Answer: Affirmative Covenants
Length of time until loan contract or agreement expires. Remaining life of bond. Answer:
Maturity or Term to Maturity
Amount borrower promises to pay on or before maturity date. Answer: Par Value
Rate when multiplied by Par Value gives amount of annual interest payment. Answer: Coupon
Rate
Bonds that do not pay interest; Instead sold at a deep discount from par values. Market
convention states semi-annual compounding used when pricing zeros. Answer: Zero-Coupon
Bonds
Characteristic of most T-Bonds and Corporate bonds. Pay only interest until maturity, at which
time full face value is paid back. Answer: Non-Amortizing Bond (Bullet Bond or Bullet
Maturity)
Pay entire principal in one lump sum at maturity. Answer: Bullet Bonds
Pay off principal thru series of pmts over time. Answer: Serial Bonds
Make periodic principal and interest pmts (i.e., MBS & ABS). Answer: Amortizing Securities
Provide for the retirement of a bond thru a series of predefined principal pmts over the life of the
issue. Answer: Sinking Fund Provisions
Cash Payment - issuer deposits cash with trustee who retires applicable proportion of bonds at
par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in the market and
delivers them to trustee who will retire them. Answer: Sinking-Fund Provisions
Conversion features, put provisions, and floors. Answer: Investor options
Call provisions, prepayment options, sinking fund provisions, and caps. Answer: Issuer options
Issuer has right (not obligation) to retire all or part of bond prior to maturity. There may be
several call dates, and customarily when a bond is called on the first permissible call date, the
call price is above par value. The call price will normally decline over time according to the
schedule. Answer: Callable Bond Provisions
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, Like a Call Option. Answer: Doubling Option
Grants right to sell (put) the bond to the issuer at a specified price prior to maturity. Answer:
Put Provision
If interest rates have risen and/or the creditworthiness of the issuer has deteriorated so that the
market price of the bond has fallen below par. Answer: When would it be beneficial for a
bondholder to exercise a put option?
Absolute protection against call prior to maturity. Answer: Non-Callable Bond
Nonrefundable bonds prohibit premature retirement of issue using proceeds of a lower cpn bd.
Bds that carry these provisions can be freely callable, but not refundable. Answer: Refunding
Provisions
Prohibit call of an issue using proceeds from a lower coupon bond issue. Answer: Non-
Refundable Bond
Grants bondholder right to convert bond into a fixed number of common shares. Options adds
value to bond. Answer: Conversion Option
Similar to conversion option, but allows conversion into a security other than common stock.
Answer: Exchange Option
Bonds that pay a variable rate of interest. Answer: Floating Rate Securities
Formula used to find new rate on a floating-rate security
[New Coupon Rate = Reference Rate (+) or (-) Quoted Margin]. Answer: Coupon Formula
(Floater)
Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin. Answer: Deleveraged
Floater
Cpn moves in direction opposite to reference rate
New Coupon Rate = Constant Rate (K) - (L * Reference Rate)
Where K is the constant and L is the multiplier Answer: Inverse Floater
Maximum rate paid by borrower/issuer. Answer: Coupon Rate Cap
Minimum periodic coupon interest payment received by lender/security owner. Answer:
Coupon Rate Floor
Simultaneous combination of both cap and floor. Answer: Coupon Rate Collar
When bonds are redeemed under the call provisions specified in the bond indenture. Answer:
Regular Redemption
APPHIA – Crafted with Care and Precision for Academic Excellence.
2
& ANSWERS | FROM QUESTION TO PERFECTION| STUDY
WITH CONFIDENCE!
Contract that specifies all the rights and obligations of the issuer and owners of a fixed income
security. Answer: Bond Indenture
Prohibitions on the borrower. Answer: Negative Covenants
Actions that the borrower promises to perform. Answer: Affirmative Covenants
Length of time until loan contract or agreement expires. Remaining life of bond. Answer:
Maturity or Term to Maturity
Amount borrower promises to pay on or before maturity date. Answer: Par Value
Rate when multiplied by Par Value gives amount of annual interest payment. Answer: Coupon
Rate
Bonds that do not pay interest; Instead sold at a deep discount from par values. Market
convention states semi-annual compounding used when pricing zeros. Answer: Zero-Coupon
Bonds
Characteristic of most T-Bonds and Corporate bonds. Pay only interest until maturity, at which
time full face value is paid back. Answer: Non-Amortizing Bond (Bullet Bond or Bullet
Maturity)
Pay entire principal in one lump sum at maturity. Answer: Bullet Bonds
Pay off principal thru series of pmts over time. Answer: Serial Bonds
Make periodic principal and interest pmts (i.e., MBS & ABS). Answer: Amortizing Securities
Provide for the retirement of a bond thru a series of predefined principal pmts over the life of the
issue. Answer: Sinking Fund Provisions
Cash Payment - issuer deposits cash with trustee who retires applicable proportion of bonds at
par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in the market and
delivers them to trustee who will retire them. Answer: Sinking-Fund Provisions
Conversion features, put provisions, and floors. Answer: Investor options
Call provisions, prepayment options, sinking fund provisions, and caps. Answer: Issuer options
Issuer has right (not obligation) to retire all or part of bond prior to maturity. There may be
several call dates, and customarily when a bond is called on the first permissible call date, the
call price is above par value. The call price will normally decline over time according to the
schedule. Answer: Callable Bond Provisions
APPHIA – Crafted with Care and Precision for Academic Excellence.
1
, Like a Call Option. Answer: Doubling Option
Grants right to sell (put) the bond to the issuer at a specified price prior to maturity. Answer:
Put Provision
If interest rates have risen and/or the creditworthiness of the issuer has deteriorated so that the
market price of the bond has fallen below par. Answer: When would it be beneficial for a
bondholder to exercise a put option?
Absolute protection against call prior to maturity. Answer: Non-Callable Bond
Nonrefundable bonds prohibit premature retirement of issue using proceeds of a lower cpn bd.
Bds that carry these provisions can be freely callable, but not refundable. Answer: Refunding
Provisions
Prohibit call of an issue using proceeds from a lower coupon bond issue. Answer: Non-
Refundable Bond
Grants bondholder right to convert bond into a fixed number of common shares. Options adds
value to bond. Answer: Conversion Option
Similar to conversion option, but allows conversion into a security other than common stock.
Answer: Exchange Option
Bonds that pay a variable rate of interest. Answer: Floating Rate Securities
Formula used to find new rate on a floating-rate security
[New Coupon Rate = Reference Rate (+) or (-) Quoted Margin]. Answer: Coupon Formula
(Floater)
Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin. Answer: Deleveraged
Floater
Cpn moves in direction opposite to reference rate
New Coupon Rate = Constant Rate (K) - (L * Reference Rate)
Where K is the constant and L is the multiplier Answer: Inverse Floater
Maximum rate paid by borrower/issuer. Answer: Coupon Rate Cap
Minimum periodic coupon interest payment received by lender/security owner. Answer:
Coupon Rate Floor
Simultaneous combination of both cap and floor. Answer: Coupon Rate Collar
When bonds are redeemed under the call provisions specified in the bond indenture. Answer:
Regular Redemption
APPHIA – Crafted with Care and Precision for Academic Excellence.
2
