CFA Fixed Income Analysis 2

Question 1

The Z-spread (zero-volatility spread) is best described as:

Accepted Answer

The constant spread added to each spot rate on the Treasury curve to make the bond's PV equal to its price

Answer

The Z-spread is the constant spread added to every spot rate on the benchmark spot curve such that the present value of cash flows equals the bond's market price.

Question 2

Which of the following best describes the option-adjusted spread (OAS)?

Accepted Answer

OAS = Z-spread – option cost

Answer

OAS removes the value of the embedded option from the Z-spread: OAS = Z-spread minus the option cost, isolating the credit and liquidity spread.

Question 3

A mortgage-backed security (MBS) is most exposed to which unique risk compared to a standard corporate bond?

Accepted Answer

Prepayment risk

Answer

MBS are exposed to prepayment risk because homeowners may refinance or sell their homes early, returning principal at inopportune times for investors.

Question 4

Under the CFA curriculum, the term structure of interest rates is best described by which of the following?

Accepted Answer

The relationship between bond yields and maturities for bonds of the same credit quality

Answer

The term structure (yield curve) shows the relationship between yields to maturity and time to maturity for bonds with the same credit quality, typically government bonds.

Question 5

Which theory of the yield curve suggests that the shape is determined solely by expectations of future short-term rates?

Accepted Answer

Pure Expectations Theory

Answer

Pure Expectations Theory holds that long-term rates are geometric averages of expected future short-term rates, with no liquidity premium or maturity preference.

CFA Practice Test

CFA Practice Test

CFA Fixed Income Analysis 2