CFA Fixed Income Analysis 2

Question 1

A bond with a 6% coupon is priced at a yield of 5%. If the yield increases by 100 bps, the price will:

Accepted Answer

Decrease by approximately the modified duration percentage

Answer

When yields rise, bond prices fall by approximately modified duration × yield change.

Question 2

Which of the following bonds has the greatest reinvestment risk?

Accepted Answer

10% coupon bond maturing in 10 years

Answer

Higher coupon bonds have greater reinvestment risk because more cash flows must be reinvested at potentially different rates.

Question 3

The Z-spread is best described as the constant spread added to:

Accepted Answer

Each Treasury spot rate to discount cash flows to the market price

Answer

The Z-spread is added to each spot rate on the benchmark Treasury curve so that the PV of cash flows equals the bond's market price.

Question 4

A callable bond's option-adjusted spread (OAS) versus its Z-spread will typically show:

Accepted Answer

OAS < Z-spread because the call option premium reduces the spread

Answer

For a callable bond, OAS < Z-spread because the Z-spread includes the value of the embedded call option that benefits the issuer.

Question 5

A bond with convexity of 120 and modified duration of 8 will experience a price change closest to which value if yields rise by 200 bps?

Accepted Answer

-15.76%

Answer

Price change ≈ -Duration × Δy + 0.5 × Convexity × (Δy)² = -8(0.02) + 0.5(120)(0.02)² = -16% + 0.24% = -15.76%.

CFA Practice Test