CFA Level 1 - Fixed Income Questions and
Answers
1. Bond Indenture: Contract that specifies all the rights and obligations of the issuer and
owners of a fixed income security.
2. Negative Covenants: Prohibitions on the borrower.
3. Affirmative Covenants: Actions that the borrower promises to perform.
4. Maturity or Term to Maturity: Length of time until loan contract or agreement
expires. Remaining life of bond.
5. Par Value: Amount borrower promises to pay on or before maturity date.
6. Coupon Rate: Rate when multiplied by Par Value gives amount of annual interest payment.
7. Zero-Coupon Bonds: 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.
8. Non-Amortizing Bond (Bullet Bond or Bullet Maturity): Characteristic of
most T-Bonds and Corporate bonds. Pay only interest until maturity, at which time full face value is
paid back.
,9. Bullet Bonds: Pay entire principal in one lump sum at maturity.
10. Serial Bonds: Pay ott principal thru series of pmts over time.
11. Amortizing Securities: Make periodic principal and interest pmts (i.e., MBS &
ABS).
12. Sinking Fund Provisions: Provide for the retirement of a bond thru a series of
predefined principal pmts over the life of the issue.
13. 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.
14. Investor options: Conversion features, put provisions, and floors.
15. Issuer options: Call provisions, prepayment options, sinking fund provisions, and
caps.
16. Callable Bond Provisions: 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.
17. Doubling Option: Like a Call Option.
18. Put Provision: Grants right to sell (put) the bond to the issuer at a specified price prior
to maturity.
19. When would it be beneficial for a bondholder to exercise a put
option?: 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.
20. Non-Callable Bond: Absolute protection against call prior to maturity.
, 21. Refunding Provisions: 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.
22. Non-Refundable Bond: Prohibit call of an issue using proceeds from a lower
coupon bond issue.
23. Conversion Option: Grants bondholder right to convert bond into a fixed number of
common shares. Options adds value to bond.
24. Exchange Option: Similar to conversion option, but allows conversion into a security
other than common stock.
25. Floating Rate Securities: Bonds that pay a variable rate of interest.
26. Coupon Formula (Floater): Formula used to find new rate on a
floating-rate security [New Coupon Rate = Reference Rate (+) or (-) Quoted Margin].
27. Deleveraged Floater: Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin.
28. Inverse 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
29. Coupon Rate Cap: Maximum rate paid by borrower/issuer.
30. Coupon Rate Floor: Minimum periodic coupon interest payment received by
lender/security owner.
31. Coupon Rate Collar: Simultaneous combination of both cap and floor.
32. Regular Redemption: When bonds are redeemed under the call provisions
specified in the bond indenture.
Answers
1. Bond Indenture: Contract that specifies all the rights and obligations of the issuer and
owners of a fixed income security.
2. Negative Covenants: Prohibitions on the borrower.
3. Affirmative Covenants: Actions that the borrower promises to perform.
4. Maturity or Term to Maturity: Length of time until loan contract or agreement
expires. Remaining life of bond.
5. Par Value: Amount borrower promises to pay on or before maturity date.
6. Coupon Rate: Rate when multiplied by Par Value gives amount of annual interest payment.
7. Zero-Coupon Bonds: 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.
8. Non-Amortizing Bond (Bullet Bond or Bullet Maturity): Characteristic of
most T-Bonds and Corporate bonds. Pay only interest until maturity, at which time full face value is
paid back.
,9. Bullet Bonds: Pay entire principal in one lump sum at maturity.
10. Serial Bonds: Pay ott principal thru series of pmts over time.
11. Amortizing Securities: Make periodic principal and interest pmts (i.e., MBS &
ABS).
12. Sinking Fund Provisions: Provide for the retirement of a bond thru a series of
predefined principal pmts over the life of the issue.
13. 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.
14. Investor options: Conversion features, put provisions, and floors.
15. Issuer options: Call provisions, prepayment options, sinking fund provisions, and
caps.
16. Callable Bond Provisions: 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.
17. Doubling Option: Like a Call Option.
18. Put Provision: Grants right to sell (put) the bond to the issuer at a specified price prior
to maturity.
19. When would it be beneficial for a bondholder to exercise a put
option?: 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.
20. Non-Callable Bond: Absolute protection against call prior to maturity.
, 21. Refunding Provisions: 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.
22. Non-Refundable Bond: Prohibit call of an issue using proceeds from a lower
coupon bond issue.
23. Conversion Option: Grants bondholder right to convert bond into a fixed number of
common shares. Options adds value to bond.
24. Exchange Option: Similar to conversion option, but allows conversion into a security
other than common stock.
25. Floating Rate Securities: Bonds that pay a variable rate of interest.
26. Coupon Formula (Floater): Formula used to find new rate on a
floating-rate security [New Coupon Rate = Reference Rate (+) or (-) Quoted Margin].
27. Deleveraged Floater: Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin.
28. Inverse 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
29. Coupon Rate Cap: Maximum rate paid by borrower/issuer.
30. Coupon Rate Floor: Minimum periodic coupon interest payment received by
lender/security owner.
31. Coupon Rate Collar: Simultaneous combination of both cap and floor.
32. Regular Redemption: When bonds are redeemed under the call provisions
specified in the bond indenture.
