CFA Fixed Income Analysis

Question 1

A bond with a 5% annual coupon, $1,000 face value, and 10 years to maturity is priced at $950. The yield to maturity (YTM) is:

Accepted Answer

Greater than 5%

Answer

When a bond trades at a discount (price below par), the YTM is higher than the coupon rate to compensate investors for the capital appreciation to par at maturity.

Question 2

Duration measures a bond's price sensitivity to changes in interest rates. If a bond has a modified duration of 7, a 1% increase in yield will cause the bond price to:

Accepted Answer

Decrease by approximately 7%

Answer

Modified duration of 7 means a 1% rise in yield causes approximately a 7% decline in bond price; duration provides an approximation, not an exact figure.

Question 3

Which of the following bonds has the greatest price sensitivity to a change in interest rates?

Accepted Answer

A 10-year bond with a 5% coupon

Answer

Longer maturity and lower coupon rate both increase duration and therefore price sensitivity; the 10-year, 5% coupon bond has the highest duration.

Question 4

Convexity in bond analysis refers to:

Accepted Answer

The curvature in the price-yield relationship that duration alone underestimates

Answer

Convexity captures the curvature in the price-yield relationship, providing a more accurate estimate of price changes than duration alone for large yield moves.

Question 5

The nominal spread of a corporate bond is defined as:

Accepted Answer

The difference between the bond's YTM and the YTM of a benchmark government bond of similar maturity

Answer

The nominal (or G-spread) is the simple difference between a corporate bond's YTM and a comparable maturity government benchmark YTM.

CFA Practice Test

CFA Practice Test

CFA Fixed Income Analysis