CFA Level I style questions on Fixed
Income, each with a clear answer.
1. What is the difference between a bond's coupon rate and its yield to
maturity (YTM)? Answer: The coupon rate is the annual interest rate stated on
the bond, while the YTM is the total return anticipated on a bond if it is held until
it matures, taking into account the current market price, par value, coupon interest
rate, and time to maturity.
2. A bond is trading at a premium. How does its coupon rate compare to its
YTM? Answer: The coupon rate is higher than the YTM.
3. A bond is trading at a discount. How does its coupon rate compare to its
YTM? Answer: The coupon rate is lower than the YTM.
4. What is the relationship between a bond's price and its yield? Answer: Bond
prices and yields have an inverse relationship. When yields increase, bond prices
decrease, and vice versa.
5. What is the clean price of a bond? Answer: The price of a bond without
accrued interest. It is the price typically quoted in the market.
6. What is the dirty price (or full price) of a bond? Answer: The price of a bond
including accrued interest. It is the price the buyer actually pays.
7. How is accrued interest calculated? Answer: (Annual Coupon Payment /
Number of Coupon Payments per Year) * (Number of Days Since Last Coupon
Payment / Number of Days in Coupon Period).
, 8. What is the maturity date of a bond? Answer: The date on which the principal
amount of the bond is repaid to the investor.
9. What is the par value (or face value) of a bond? Answer: The principal
amount of the bond that will be repaid at maturity. It is usually $1,000 for
corporate bonds.
10. What are the main types of fixed-income securities? Answer: Treasury
securities, agency securities, municipal securities, corporate bonds, and asset-
backed securities.
11. What are Treasury bills, notes, and bonds? What are their typical
maturities? Answer: Treasury bills have maturities of one year or less, Treasury
notes have maturities of two to ten years, and Treasury bonds have maturities of
more than ten years.
12. What are agency securities? Provide some examples. Answer: Debt
securities issued by government-sponsored enterprises (GSEs) and federal
agencies. Examples include Fannie Mae, Freddie Mac, and Federal Home Loan
Banks.
13. What are municipal bonds? What is a key characteristic that makes them
attractive to some investors? Answer: Debt securities issued by state and local
governments. A key characteristic is that their interest income is often exempt from
federal, and sometimes state and local, income taxes.
14. What are the two main types of municipal bonds? Describe them. Answer:
General obligation (GO) bonds, which are backed by the full faith and credit of the
Income, each with a clear answer.
1. What is the difference between a bond's coupon rate and its yield to
maturity (YTM)? Answer: The coupon rate is the annual interest rate stated on
the bond, while the YTM is the total return anticipated on a bond if it is held until
it matures, taking into account the current market price, par value, coupon interest
rate, and time to maturity.
2. A bond is trading at a premium. How does its coupon rate compare to its
YTM? Answer: The coupon rate is higher than the YTM.
3. A bond is trading at a discount. How does its coupon rate compare to its
YTM? Answer: The coupon rate is lower than the YTM.
4. What is the relationship between a bond's price and its yield? Answer: Bond
prices and yields have an inverse relationship. When yields increase, bond prices
decrease, and vice versa.
5. What is the clean price of a bond? Answer: The price of a bond without
accrued interest. It is the price typically quoted in the market.
6. What is the dirty price (or full price) of a bond? Answer: The price of a bond
including accrued interest. It is the price the buyer actually pays.
7. How is accrued interest calculated? Answer: (Annual Coupon Payment /
Number of Coupon Payments per Year) * (Number of Days Since Last Coupon
Payment / Number of Days in Coupon Period).
, 8. What is the maturity date of a bond? Answer: The date on which the principal
amount of the bond is repaid to the investor.
9. What is the par value (or face value) of a bond? Answer: The principal
amount of the bond that will be repaid at maturity. It is usually $1,000 for
corporate bonds.
10. What are the main types of fixed-income securities? Answer: Treasury
securities, agency securities, municipal securities, corporate bonds, and asset-
backed securities.
11. What are Treasury bills, notes, and bonds? What are their typical
maturities? Answer: Treasury bills have maturities of one year or less, Treasury
notes have maturities of two to ten years, and Treasury bonds have maturities of
more than ten years.
12. What are agency securities? Provide some examples. Answer: Debt
securities issued by government-sponsored enterprises (GSEs) and federal
agencies. Examples include Fannie Mae, Freddie Mac, and Federal Home Loan
Banks.
13. What are municipal bonds? What is a key characteristic that makes them
attractive to some investors? Answer: Debt securities issued by state and local
governments. A key characteristic is that their interest income is often exempt from
federal, and sometimes state and local, income taxes.
14. What are the two main types of municipal bonds? Describe them. Answer:
General obligation (GO) bonds, which are backed by the full faith and credit of the
