CFA Practice Questions: Fixed Income With
All Correct Solutions.
Which are Money market securities?
I. Public and private bonds with a time to maturity of greater than one year
II. Fixed-income instruments with maturities of less than one year, such as commercial paper
III. Bonds that have no stated maturity date - Answer II is correct.
Description:
Money market securities are fixed-income instruments with maturities of less than one year, such as
commercial paper.
Which are Capital market securities?
I. Public and private bonds with a time to maturity of greater than one year
I. Fixed-income instruments with maturities of less than one year, such as commercial paper
III. Bonds that have no stated maturity date - Answer I is correct.
Description:
Capital market securities are public and private bonds with a time to maturity of greater than one year.
Which are Perpetual bonds?
I. Public and private bonds with a time to maturity of greater than one year
I. Fixed-income instruments with maturities of less than one year, such as commercial paper
III. Bonds that have no stated maturity date - Answer III is correct.
Description:
,Perpetual bonds have no stated maturity date.
Calculate the coupon payment on a 2.5% coupon bond with GBP100,000 par value and a semiannual
payment frequency. - Answer The correct answer is GBP1,250.
Description:
The annual coupon on a bond is calculated by multiplying the coupon rate and the par value. For this
bond, the coupon rate of 2.5% and par value of GBP100,000 results in a GBP2,500 annual coupon.
However, since the payment frequency is semiannual (twice a year), each coupon payment is GBP1,250.
Determine the appropriate FRN coupon and interest payable in the following example: A European
corporation issues a EUR10 million FRN that pays quarterly interest equal to the three-month MRR plus
125 bps. If three-month MRR is -0.50%, what is the corporation's FRN coupon interest payable on the
FRN for the period? - Answer The answer is EUR18,750.
Description:
An FRN coupon comprises MRR plus the issuer-specific spread.
FRN coupon = MRR + Spread.FRN coupon = -0.50% + 1.25%.FRN coupon = 0.75%.Annual interest =
Principal × FRN coupon.Annual interest = €10,000,000 × 0.75%.Annual interest = €75,000, or €18,750 on
a quarterly basis.
Fill in the blanks. The current yield is equal to a bond's annual _____ divided by the bond's price
expressed as a percentage. If the bond's price were to fall, we would expect the current yield to ____. -
Answer coupon ; Rise
Fill in the blanks. A downward-sloping yield curve indicates that yields-to-maturity on an issuer's longer-
term bonds are __________ than yields-to-maturity on that issuer's shorter-term bonds. - Answer
lower
Explain the difference in the sources of repayment for a secured and an unsecured corporate bond. -
Answer The sole source of repayment for unsecured corporate bonds is typically operating cash flows
of the issuer, while secured corporate bonds also include specific assets as a secondary source of debt
repayment in addition to the issuer's operating cash flows.
, Describe the source of repayment for asset-backed securities. - Answer The source of repayment for
asset-backed securities are cash flows from the group of loans or receivables owned by the special
purpose issuer.
Which (are/is) an Affirmative Covenant?
I. Additional Debt Restriction
II. Cross-Default Clause
III. Interest Coverage Minimum - Answer II is correct.
Description:
A cross-default clause specifies that borrowers are considered in default if they default on another debt
obligation and is an affirmative covenant.
Which (are/is) an Negative Covenant?
I. Additional Debt Restriction
II. Cross-Default Clause
III. Interest Coverage Minimum - Answer I and III are correct.
Description:
An additional debt restriction clause limits an increase in issuer debt and is a negative covenant. An
interest coverage minimum limits the amount of leverage relative to an issuer's operating income or
EBITDA.
Describe the difference between affirmative and negative bond covenants. - Answer Affirmative
covenants specify what issuers are required to do, whereas negative covenants specify what issuers are
prohibited from doing.
Fill in the blanks. Covenant violations provide bondholders recourse in several possible ways, including a
change in _________ terms, such as an increase in a bond's interest rate or security, ___________ debt
payments, or ___________ of the debt agreement. - Answer financial; Accelerated; termination
All Correct Solutions.
Which are Money market securities?
I. Public and private bonds with a time to maturity of greater than one year
II. Fixed-income instruments with maturities of less than one year, such as commercial paper
III. Bonds that have no stated maturity date - Answer II is correct.
Description:
Money market securities are fixed-income instruments with maturities of less than one year, such as
commercial paper.
Which are Capital market securities?
I. Public and private bonds with a time to maturity of greater than one year
I. Fixed-income instruments with maturities of less than one year, such as commercial paper
III. Bonds that have no stated maturity date - Answer I is correct.
Description:
Capital market securities are public and private bonds with a time to maturity of greater than one year.
Which are Perpetual bonds?
I. Public and private bonds with a time to maturity of greater than one year
I. Fixed-income instruments with maturities of less than one year, such as commercial paper
III. Bonds that have no stated maturity date - Answer III is correct.
Description:
,Perpetual bonds have no stated maturity date.
Calculate the coupon payment on a 2.5% coupon bond with GBP100,000 par value and a semiannual
payment frequency. - Answer The correct answer is GBP1,250.
Description:
The annual coupon on a bond is calculated by multiplying the coupon rate and the par value. For this
bond, the coupon rate of 2.5% and par value of GBP100,000 results in a GBP2,500 annual coupon.
However, since the payment frequency is semiannual (twice a year), each coupon payment is GBP1,250.
Determine the appropriate FRN coupon and interest payable in the following example: A European
corporation issues a EUR10 million FRN that pays quarterly interest equal to the three-month MRR plus
125 bps. If three-month MRR is -0.50%, what is the corporation's FRN coupon interest payable on the
FRN for the period? - Answer The answer is EUR18,750.
Description:
An FRN coupon comprises MRR plus the issuer-specific spread.
FRN coupon = MRR + Spread.FRN coupon = -0.50% + 1.25%.FRN coupon = 0.75%.Annual interest =
Principal × FRN coupon.Annual interest = €10,000,000 × 0.75%.Annual interest = €75,000, or €18,750 on
a quarterly basis.
Fill in the blanks. The current yield is equal to a bond's annual _____ divided by the bond's price
expressed as a percentage. If the bond's price were to fall, we would expect the current yield to ____. -
Answer coupon ; Rise
Fill in the blanks. A downward-sloping yield curve indicates that yields-to-maturity on an issuer's longer-
term bonds are __________ than yields-to-maturity on that issuer's shorter-term bonds. - Answer
lower
Explain the difference in the sources of repayment for a secured and an unsecured corporate bond. -
Answer The sole source of repayment for unsecured corporate bonds is typically operating cash flows
of the issuer, while secured corporate bonds also include specific assets as a secondary source of debt
repayment in addition to the issuer's operating cash flows.
, Describe the source of repayment for asset-backed securities. - Answer The source of repayment for
asset-backed securities are cash flows from the group of loans or receivables owned by the special
purpose issuer.
Which (are/is) an Affirmative Covenant?
I. Additional Debt Restriction
II. Cross-Default Clause
III. Interest Coverage Minimum - Answer II is correct.
Description:
A cross-default clause specifies that borrowers are considered in default if they default on another debt
obligation and is an affirmative covenant.
Which (are/is) an Negative Covenant?
I. Additional Debt Restriction
II. Cross-Default Clause
III. Interest Coverage Minimum - Answer I and III are correct.
Description:
An additional debt restriction clause limits an increase in issuer debt and is a negative covenant. An
interest coverage minimum limits the amount of leverage relative to an issuer's operating income or
EBITDA.
Describe the difference between affirmative and negative bond covenants. - Answer Affirmative
covenants specify what issuers are required to do, whereas negative covenants specify what issuers are
prohibited from doing.
Fill in the blanks. Covenant violations provide bondholders recourse in several possible ways, including a
change in _________ terms, such as an increase in a bond's interest rate or security, ___________ debt
payments, or ___________ of the debt agreement. - Answer financial; Accelerated; termination
