CFA Fixed Income Level 2 Top 100% Verified Questions
& Answers 2025 Update A+ Guaranteed
When evaluating the loans backing a commercial mortgage-backed security based on credit ratios,
which of the following most likely indicate better credit quality?
A) Higher debt-service coverage ratios and lower loan-to-value ratios.
B) Lower debt-service coverage ratios and higher loan-to-value ratios.
C) Higher debt-service coverage ratios and higher loan-to-value ratios. - ANS ✔ - A) Higher debt-
service coverage ratios and lower loan-to-value ratios.
A collateralized debt obligation (CDO) in which the collateral is a pool of residential mortgage-backed
securities is most accurately described as a:
A) Collateralized loan obligation (CLO).
B) Structured finance CDO.
C) Synthetic CDO. - ANS ✔ - B) Structured finance CDO.
Assume that a straight bond has a duration of 1.89 and a convexity of 32. If interest rates decline by
1%, what is the total estimated percentage price change of the bond?
A) 1.56%.
B) 1.89%.
C) 2.05%. - ANS ✔ - C) 2.05%.
Which of the following statements regarding zero-coupon bonds and spot interest rates is CORRECT?
A) If the yield to maturity on a 2-year zero-coupon bond is 6%, then the 2-year spot rate is 3%.
B) Price appreciation creates all of the zero-coupon bond's return.
C) Spot interest rates will never vary across the term structure. - ANS ✔ - B) Price appreciation
creates all of the zero-coupon bond's return.
A bond currently trading at 102.5 percent of par value has an approximate modified duration of 6.5
and an approximate convexity of 28.0. If the bond's yield increases by 200 basis points, its estimated
price will be closest to:
,A) 90.32.
B) 89.75.
C) 89.18. - ANS ✔ - B) 89.75.
The six-year spot rate is 7% and the five-year spot rate is 6%. The implied one-year forward rate five
years from now is closest to:
A) 12.0%.
B) 5.0%.
C) 6.5%. - ANS ✔ - A) 12.0%.
A three-year annual coupon bond has a par value of $1,000 and a coupon rate of 5.5%. The spot rate
for year 1 is 5.2%, the spot rate for year 2 is 5.5%, and the spot rate for year 3 is 5.7%. The value of
the coupon bond is closest to:
A) $1,000.00.
B) $937.66.
C) $995.06. - ANS ✔ - C) $995.06.
A bond is currently priced at 92.35. If the calculated modified duration is 3.27 and the convexity is
15.74, the expected new price of the bond due to a 50 basis point increase in yields is closest to:
A) 93.878.
B) 91.591.
C) 90.859. - ANS ✔ - C) 90.859.
Negative effective convexity will most likely be exhibited by a:
A) Callable bond at high yields.
B) Callable bond at low yields.
C) Putable bond at high yields. - ANS ✔ - B) Callable bond at low yields.
The 3-year annual spot rate is 7%, the 4-year annual spot rate is 7.5%, and the 5-year annual spot
rate is 8%. The 1-year forward rate four years from now is closest to:
A) 7%.
,B) 9%.
C) 10%. - ANS ✔ - C) 10%.
A callable bond trading at $1,000 has an effective duration of 5 and modified duration of 6. If the
market yield increases by 1%, the bond's price will decrease by approximately:
A) $60.
B) $50.
C) $55. - ANS ✔ - B) $50.
An analyst collects the following information regarding spot rates:
1-year rate = 4%.
2-year rate = 5%.
3-year rate = 6%.
4-year rate = 7%.
The 2-year forward rate two years from today is closest to:
A) 8.03%.
B) 9.04%.
C) 7.02%. - ANS ✔ - B) 9.04%.
Key rate duration is best described as a measure of price sensitivity to a:
A) Change in a bond's cash flows.
B) Change in yield at a single maturity.
C) Parallel shift in the benchmark yield curve. - ANS ✔ - B) Change in yield at a single maturity.
The special purpose entity (SPE) in a securitization is:
A) A joint venture partner of the seller.
B) A subsidiary of the seller.
C) An entity independent of the seller. - ANS ✔ - C) An entity independent of the seller.
, The 3-year spot rate is 10%, and the 4-year spot rate is 10.5%. What is the 1-year forward rate 3
years from now?
A) 10.0%.
B) 11.0%.
C) 12.0%. - ANS ✔ - C) 12.0%.
A fixed-income portfolio manager is estimating portfolio duration based on the weighted average of
the durations of each bond in the portfolio. The manager should calculate duration using:
A) Parallel shifts of the benchmark yield curve.
B) Equal-sized increases and decreases in a benchmark bond's yield.
C) Equal-sized increases and decreases in the portfolio's cash flow yield. - ANS ✔ - A) Parallel shifts
of the benchmark yield curve.
A $1,000 face, 10-year, 8.00% semi-annual coupon, option-free bond is issued at par (market rates
are thus 8.00%). Given that the bond price decreased 10.03% when market rates increased 150 basis
points, if market yields decrease by 150 basis points, the bond's price will:
A) Increase by more than 10.03%.
B) Increase by 10.03%.
C) Decrease by more than 10.03%. - ANS ✔ - A) Increase by more than 10.03%.
A bond is currently priced at 92.35. If the calculated modified duration is 3.27 and the convexity is
15.74, the expected price change due to a 25 basis point decrease in yields is closest to:
A) 0.8224%.
B) 0.8126%.
C) 0.8028%. - ANS ✔ - A) 0.8224%.
Price change estimates based on duration alone are improved by positive convexity adjustments for:
A) Yield decreases, and negative convexity adjustments for yield increases.
B) Yield increases, and negative convexity adjustments for yield decreases.
C) Both increases and decreases in yield. - ANS ✔ - C) Both increases and decreases in yield.
& Answers 2025 Update A+ Guaranteed
When evaluating the loans backing a commercial mortgage-backed security based on credit ratios,
which of the following most likely indicate better credit quality?
A) Higher debt-service coverage ratios and lower loan-to-value ratios.
B) Lower debt-service coverage ratios and higher loan-to-value ratios.
C) Higher debt-service coverage ratios and higher loan-to-value ratios. - ANS ✔ - A) Higher debt-
service coverage ratios and lower loan-to-value ratios.
A collateralized debt obligation (CDO) in which the collateral is a pool of residential mortgage-backed
securities is most accurately described as a:
A) Collateralized loan obligation (CLO).
B) Structured finance CDO.
C) Synthetic CDO. - ANS ✔ - B) Structured finance CDO.
Assume that a straight bond has a duration of 1.89 and a convexity of 32. If interest rates decline by
1%, what is the total estimated percentage price change of the bond?
A) 1.56%.
B) 1.89%.
C) 2.05%. - ANS ✔ - C) 2.05%.
Which of the following statements regarding zero-coupon bonds and spot interest rates is CORRECT?
A) If the yield to maturity on a 2-year zero-coupon bond is 6%, then the 2-year spot rate is 3%.
B) Price appreciation creates all of the zero-coupon bond's return.
C) Spot interest rates will never vary across the term structure. - ANS ✔ - B) Price appreciation
creates all of the zero-coupon bond's return.
A bond currently trading at 102.5 percent of par value has an approximate modified duration of 6.5
and an approximate convexity of 28.0. If the bond's yield increases by 200 basis points, its estimated
price will be closest to:
,A) 90.32.
B) 89.75.
C) 89.18. - ANS ✔ - B) 89.75.
The six-year spot rate is 7% and the five-year spot rate is 6%. The implied one-year forward rate five
years from now is closest to:
A) 12.0%.
B) 5.0%.
C) 6.5%. - ANS ✔ - A) 12.0%.
A three-year annual coupon bond has a par value of $1,000 and a coupon rate of 5.5%. The spot rate
for year 1 is 5.2%, the spot rate for year 2 is 5.5%, and the spot rate for year 3 is 5.7%. The value of
the coupon bond is closest to:
A) $1,000.00.
B) $937.66.
C) $995.06. - ANS ✔ - C) $995.06.
A bond is currently priced at 92.35. If the calculated modified duration is 3.27 and the convexity is
15.74, the expected new price of the bond due to a 50 basis point increase in yields is closest to:
A) 93.878.
B) 91.591.
C) 90.859. - ANS ✔ - C) 90.859.
Negative effective convexity will most likely be exhibited by a:
A) Callable bond at high yields.
B) Callable bond at low yields.
C) Putable bond at high yields. - ANS ✔ - B) Callable bond at low yields.
The 3-year annual spot rate is 7%, the 4-year annual spot rate is 7.5%, and the 5-year annual spot
rate is 8%. The 1-year forward rate four years from now is closest to:
A) 7%.
,B) 9%.
C) 10%. - ANS ✔ - C) 10%.
A callable bond trading at $1,000 has an effective duration of 5 and modified duration of 6. If the
market yield increases by 1%, the bond's price will decrease by approximately:
A) $60.
B) $50.
C) $55. - ANS ✔ - B) $50.
An analyst collects the following information regarding spot rates:
1-year rate = 4%.
2-year rate = 5%.
3-year rate = 6%.
4-year rate = 7%.
The 2-year forward rate two years from today is closest to:
A) 8.03%.
B) 9.04%.
C) 7.02%. - ANS ✔ - B) 9.04%.
Key rate duration is best described as a measure of price sensitivity to a:
A) Change in a bond's cash flows.
B) Change in yield at a single maturity.
C) Parallel shift in the benchmark yield curve. - ANS ✔ - B) Change in yield at a single maturity.
The special purpose entity (SPE) in a securitization is:
A) A joint venture partner of the seller.
B) A subsidiary of the seller.
C) An entity independent of the seller. - ANS ✔ - C) An entity independent of the seller.
, The 3-year spot rate is 10%, and the 4-year spot rate is 10.5%. What is the 1-year forward rate 3
years from now?
A) 10.0%.
B) 11.0%.
C) 12.0%. - ANS ✔ - C) 12.0%.
A fixed-income portfolio manager is estimating portfolio duration based on the weighted average of
the durations of each bond in the portfolio. The manager should calculate duration using:
A) Parallel shifts of the benchmark yield curve.
B) Equal-sized increases and decreases in a benchmark bond's yield.
C) Equal-sized increases and decreases in the portfolio's cash flow yield. - ANS ✔ - A) Parallel shifts
of the benchmark yield curve.
A $1,000 face, 10-year, 8.00% semi-annual coupon, option-free bond is issued at par (market rates
are thus 8.00%). Given that the bond price decreased 10.03% when market rates increased 150 basis
points, if market yields decrease by 150 basis points, the bond's price will:
A) Increase by more than 10.03%.
B) Increase by 10.03%.
C) Decrease by more than 10.03%. - ANS ✔ - A) Increase by more than 10.03%.
A bond is currently priced at 92.35. If the calculated modified duration is 3.27 and the convexity is
15.74, the expected price change due to a 25 basis point decrease in yields is closest to:
A) 0.8224%.
B) 0.8126%.
C) 0.8028%. - ANS ✔ - A) 0.8224%.
Price change estimates based on duration alone are improved by positive convexity adjustments for:
A) Yield decreases, and negative convexity adjustments for yield increases.
B) Yield increases, and negative convexity adjustments for yield decreases.
C) Both increases and decreases in yield. - ANS ✔ - C) Both increases and decreases in yield.
