CFA LEVEL 1 - FIXED INCOME EXAM ACTUAL
QUESTIONS & ANSWERS | FROM QUESTION TO
PERFECTION| STUDY WITH CONFIDENCE!
Bond Indenture Answer: Contract that specifies all the rights and obligations of the issuer and
owners of a fixed income security.
Negative Covenants Answer: Prohibitions on the borrower.
Affirmative Covenants Answer: Actions that the borrower promises to perform.
Maturity or Term to Maturity Answer: Length of time until loan contract or agreement expires.
Remaining life of bond.
Par Value Answer: Amount borrower promises to pay on or before maturity date.
Coupon Rate Answer: Rate when multiplied by Par Value gives amount of annual interest
payment.
Zero-Coupon Bonds Answer: 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.
Non-Amortizing Bond (Bullet Bond or Bullet Maturity) Answer: Characteristic of most T-
Bonds and Corporate bonds. Pay only interest until maturity, at which time full face value is
paid back.
Bullet Bonds Answer: Pay entire principal in one lump sum at maturity.
Serial Bonds Answer: Pay off principal thru series of pmts over time.
Amortizing Securities Answer: Make periodic principal and interest pmts (i.e., MBS & ABS).
Sinking Fund Provisions Answer: Provide for the retirement of a bond thru a series of
predefined principal pmts over the life of the issue.
Sinking-Fund Provisions Answer: 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.
Investor options Answer: Conversion features, put provisions, and floors.
Issuer options Answer: Call provisions, prepayment options, sinking fund provisions, and caps.
Callable Bond Provisions Answer: 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.
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, Doubling Option Answer: Like a Call Option.
Put Provision Answer: Grants right to sell (put) the bond to the issuer at a specified price prior
to maturity.
When would it be beneficial for a bondholder to exercise a put option? Answer: 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.
Non-Callable Bond Answer: Absolute protection against call prior to maturity.
Refunding Provisions Answer: 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.
Non-Refundable Bond Answer: Prohibit call of an issue using proceeds from a lower coupon
bond issue.
Conversion Option Answer: Grants bondholder right to convert bond into a fixed number of
common shares. Options adds value to bond.
Exchange Option Answer: Similar to conversion option, but allows conversion into a security
other than common stock.
Floating Rate Securities Answer: Bonds that pay a variable rate of interest.
Coupon Formula (Floater) Answer: Formula used to find new rate on a floating-rate security
[New Coupon Rate = Reference Rate (+) or (-) Quoted Margin].
Deleveraged Floater Answer: Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin.
Inverse Floater Answer: 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
Coupon Rate Cap Answer: Maximum rate paid by borrower/issuer.
Coupon Rate Floor Answer: Minimum periodic coupon interest payment received by
lender/security owner.
Coupon Rate Collar Answer: Simultaneous combination of both cap and floor.
Regular Redemption Answer: When bonds are redeemed under the call provisions specified in
the bond indenture.
Special Redemption Answer: When bonds are redeemed to comply with a sinking fund
provision or because of a property sale mandated by government authority.
APPHIA – Crafted with Care and Precision for Academic Excellence.
2
QUESTIONS & ANSWERS | FROM QUESTION TO
PERFECTION| STUDY WITH CONFIDENCE!
Bond Indenture Answer: Contract that specifies all the rights and obligations of the issuer and
owners of a fixed income security.
Negative Covenants Answer: Prohibitions on the borrower.
Affirmative Covenants Answer: Actions that the borrower promises to perform.
Maturity or Term to Maturity Answer: Length of time until loan contract or agreement expires.
Remaining life of bond.
Par Value Answer: Amount borrower promises to pay on or before maturity date.
Coupon Rate Answer: Rate when multiplied by Par Value gives amount of annual interest
payment.
Zero-Coupon Bonds Answer: 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.
Non-Amortizing Bond (Bullet Bond or Bullet Maturity) Answer: Characteristic of most T-
Bonds and Corporate bonds. Pay only interest until maturity, at which time full face value is
paid back.
Bullet Bonds Answer: Pay entire principal in one lump sum at maturity.
Serial Bonds Answer: Pay off principal thru series of pmts over time.
Amortizing Securities Answer: Make periodic principal and interest pmts (i.e., MBS & ABS).
Sinking Fund Provisions Answer: Provide for the retirement of a bond thru a series of
predefined principal pmts over the life of the issue.
Sinking-Fund Provisions Answer: 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.
Investor options Answer: Conversion features, put provisions, and floors.
Issuer options Answer: Call provisions, prepayment options, sinking fund provisions, and caps.
Callable Bond Provisions Answer: 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.
APPHIA – Crafted with Care and Precision for Academic Excellence.
1
, Doubling Option Answer: Like a Call Option.
Put Provision Answer: Grants right to sell (put) the bond to the issuer at a specified price prior
to maturity.
When would it be beneficial for a bondholder to exercise a put option? Answer: 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.
Non-Callable Bond Answer: Absolute protection against call prior to maturity.
Refunding Provisions Answer: 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.
Non-Refundable Bond Answer: Prohibit call of an issue using proceeds from a lower coupon
bond issue.
Conversion Option Answer: Grants bondholder right to convert bond into a fixed number of
common shares. Options adds value to bond.
Exchange Option Answer: Similar to conversion option, but allows conversion into a security
other than common stock.
Floating Rate Securities Answer: Bonds that pay a variable rate of interest.
Coupon Formula (Floater) Answer: Formula used to find new rate on a floating-rate security
[New Coupon Rate = Reference Rate (+) or (-) Quoted Margin].
Deleveraged Floater Answer: Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin.
Inverse Floater Answer: 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
Coupon Rate Cap Answer: Maximum rate paid by borrower/issuer.
Coupon Rate Floor Answer: Minimum periodic coupon interest payment received by
lender/security owner.
Coupon Rate Collar Answer: Simultaneous combination of both cap and floor.
Regular Redemption Answer: When bonds are redeemed under the call provisions specified in
the bond indenture.
Special Redemption Answer: When bonds are redeemed to comply with a sinking fund
provision or because of a property sale mandated by government authority.
APPHIA – Crafted with Care and Precision for Academic Excellence.
2
