CFA Institute Fixed Income Practice Questions
& Answers 2025 Update
A 10-year bond was issued four years ago. The bond is denominated in US dollars, offers a coupon
rate of 10% with interest paid semi-annually, and is currently priced at 102% of par. The bond's:
Tenor is six years.
Nominal rate is 5%.
Redemption value is 102% of the par value. - ANS ✔ - tenor is six years.
When a bond investor's coupon reinvestment risk dominates market price risk, the investor's
investment horizon must be:
A) less than the Macaulay duration of the bond.
B) Equal to the Macaulay duration of the bond.
C) greater than the Macaulay duration of the bond. - ANS ✔ - C) greater than the Macaulay duration
of the bond.
HOW TO CALCULATE THIS?? Consider the following information relating to a corporate bond: Full
price of bond (PVFull) $100,367,242Modified duration (Ann ModDur) 8.124 years Accrued
interest$303,218
The money duration of the corporate bond is closest to:
$812,920,131.
$815,383,474.
$817,846,817. - ANS ✔ - $815,383,474.
8.124 × $100,367,242
In which scenario would yields most likely narrow?
A) Weak financial markets
B) High demand for bonds
C) Slowdown in market-making activity - ANS ✔ - B) High demand for bonds
, In periods of high demand, bond prices will increase and yields will decrease (since bond price and
yield are inversely related); consequently, yield spreads (the difference in yield between a corporate
bond and default-free bond) will tighten (narrow).
Which of the following balance sheet items is least likely a sign of high-quality assets? High amounts
of:
A) Patents.
B) Goodwill.
C) Capital expenditure relative to depreciation. - ANS ✔ - B) goodwill.
Which of the following is the least likely reason a company would issue subordinated debt?
Subordinated debt is less:
A) Expensive than equity.
B) Restrictive than secured debt.
C) Expensive than senior debt. - ANS ✔ - C) expensive than senior debt.
To obtain the spot yield curve, a bond analyst would most likely use the most:
Recently issued and actively traded corporate bonds.
Recently issued and actively traded government bonds.
Seasoned and actively traded government bonds. - ANS ✔ - recently issued and actively traded
government bonds.
To obtain the spot yield curve, a bond analyst would prefer to use the most recently issued and
actively traded government bonds. Such bonds will have similar liquidity as well as fewer tax effects
because they will be priced closer to par value.
Ted Nguyen is an investor domiciled in a country with an original issue discount tax provision. He
purchases a zero-coupon bond at a deep discount to par value with the intention of holding the bond
until maturity. At maturity, he will most likely face:
A capital gain.
Neither a capital loss nor gain.
A capital loss. - ANS ✔ - neither a capital loss nor gain.
An original issue discount tax provision allows the investor to increase the cost basis of the bond, so
when the bond matures, the investor faces no capital gain or loss.
& Answers 2025 Update
A 10-year bond was issued four years ago. The bond is denominated in US dollars, offers a coupon
rate of 10% with interest paid semi-annually, and is currently priced at 102% of par. The bond's:
Tenor is six years.
Nominal rate is 5%.
Redemption value is 102% of the par value. - ANS ✔ - tenor is six years.
When a bond investor's coupon reinvestment risk dominates market price risk, the investor's
investment horizon must be:
A) less than the Macaulay duration of the bond.
B) Equal to the Macaulay duration of the bond.
C) greater than the Macaulay duration of the bond. - ANS ✔ - C) greater than the Macaulay duration
of the bond.
HOW TO CALCULATE THIS?? Consider the following information relating to a corporate bond: Full
price of bond (PVFull) $100,367,242Modified duration (Ann ModDur) 8.124 years Accrued
interest$303,218
The money duration of the corporate bond is closest to:
$812,920,131.
$815,383,474.
$817,846,817. - ANS ✔ - $815,383,474.
8.124 × $100,367,242
In which scenario would yields most likely narrow?
A) Weak financial markets
B) High demand for bonds
C) Slowdown in market-making activity - ANS ✔ - B) High demand for bonds
, In periods of high demand, bond prices will increase and yields will decrease (since bond price and
yield are inversely related); consequently, yield spreads (the difference in yield between a corporate
bond and default-free bond) will tighten (narrow).
Which of the following balance sheet items is least likely a sign of high-quality assets? High amounts
of:
A) Patents.
B) Goodwill.
C) Capital expenditure relative to depreciation. - ANS ✔ - B) goodwill.
Which of the following is the least likely reason a company would issue subordinated debt?
Subordinated debt is less:
A) Expensive than equity.
B) Restrictive than secured debt.
C) Expensive than senior debt. - ANS ✔ - C) expensive than senior debt.
To obtain the spot yield curve, a bond analyst would most likely use the most:
Recently issued and actively traded corporate bonds.
Recently issued and actively traded government bonds.
Seasoned and actively traded government bonds. - ANS ✔ - recently issued and actively traded
government bonds.
To obtain the spot yield curve, a bond analyst would prefer to use the most recently issued and
actively traded government bonds. Such bonds will have similar liquidity as well as fewer tax effects
because they will be priced closer to par value.
Ted Nguyen is an investor domiciled in a country with an original issue discount tax provision. He
purchases a zero-coupon bond at a deep discount to par value with the intention of holding the bond
until maturity. At maturity, he will most likely face:
A capital gain.
Neither a capital loss nor gain.
A capital loss. - ANS ✔ - neither a capital loss nor gain.
An original issue discount tax provision allows the investor to increase the cost basis of the bond, so
when the bond matures, the investor faces no capital gain or loss.
