Preparing for the CFA Level 1 exam requires strong mastery of Fixed Income, one of the most heavily weighted topics in the curriculum. This guide provides 200+ carefully designed practice questions with detailed answers and explanations to help you build exam confidence.
Whether you are preparing in the United States, United Kingdom, Canada, Australia, or anywhere globally, these fixed income MCQs align with the CFA Institute curriculum and are crafted by finance professionals to ensure accuracy, depth, and real exam-style experience.
From bonds and yield curves to duration, credit spreads, securitization, and portfolio strategies, this master resource covers every key area of fixed income, helping you strengthen both conceptual knowledge and practical exam readiness.
CFA Level 1 Fixed Income – Practice Questions
Q1.
Which of the following is most likely considered a fixed-income security?
A. Common stock
B. Treasury bond
C. Real estate
D. Mutual fund
Answer: B. Treasury bond
Explanation: Fixed-income securities are debt instruments that pay a fixed return, such as bonds. Treasury bonds are classic examples, while common stock and real estate are equity/asset-based investments.
Q2.
The par value of a bond is:
A. Its market price
B. The amount the issuer agrees to repay at maturity
C. The coupon payment received each year
D. The yield to maturity
Answer: B. The amount the issuer agrees to repay at maturity
Explanation: Par (or face) value represents the repayment value at maturity, usually $1,000 per bond unless otherwise stated.
Q3.
Which risk is most relevant for fixed-rate bonds when interest rates rise?
A. Credit risk
B. Liquidity risk
C. Interest rate risk
D. Inflation risk
Answer: C. Interest rate risk
Explanation: Fixed-rate bond prices fall when market interest rates rise, exposing investors to interest rate risk.
Q4.
A bond with a 7% coupon rate and annual payments is trading at a premium. This means:
A. Coupon rate < Yield to maturity
B. Coupon rate > Yield to maturity
C. Coupon rate = Current yield
D. Coupon rate = Yield to maturity
Answer: B. Coupon rate > Yield to maturity
Explanation: Premium bonds trade above par because their coupon payments are higher than market yields.
Q5.
Zero-coupon bonds:
A. Pay interest annually
B. Are issued at par value
C. Are issued at a discount and pay no periodic interest
D. Have no maturity date
Answer: C. Are issued at a discount and pay no periodic interest
Explanation: Zero-coupon bonds provide returns through price appreciation only and are issued at a discount.
Q6.
Which of the following best defines duration?
A. The maturity date of a bond
B. A measure of price sensitivity to interest rate changes
C. The time until the first coupon payment
D. The yield-to-maturity of a bond
Answer: B. A measure of price sensitivity to interest rate changes
Explanation: Duration measures how sensitive a bond’s price is to changes in interest rates.
Q7.
If a bond’s duration is 5 years, a 1% increase in interest rates will cause its price to:
A. Increase by 5%
B. Decrease by 5%
C. Decrease by 0.5%
D. Remain unchanged
Answer: B. Decrease by 5%
Explanation: Bond price change ≈ –Duration × ΔYield. A 1% increase leads to a ~5% decline.
Q8.
Callable bonds are most disadvantageous to investors when:
A. Market interest rates fall
B. Market interest rates rise
C. Inflation decreases
D. Credit spreads widen
Answer: A. Market interest rates fall
Explanation: When rates fall, issuers can call bonds and refinance at lower rates, limiting investor gains.
Q9.
Which type of bond is backed by a pool of mortgages?
A. Convertible bond
B. Treasury bill
C. Mortgage-backed security (MBS)
D. Corporate debenture
Answer: C. Mortgage-backed security (MBS)
Explanation: MBS are created by pooling mortgage loans and issuing securities backed by the cash flows.
Q10.
Which yield measure assumes all coupon payments are reinvested at the yield to maturity?
A. Current yield
B. Yield to maturity (YTM)
C. Yield to call
D. Nominal yield
Answer: B. Yield to maturity (YTM)
Explanation: YTM assumes reinvestment of coupons at the same rate and measures total return until maturity.
Q11.
What does a bond indenture typically include?
A. Stockholder voting rights
B. Terms of bond issue, covenants, and repayment provisions
C. Corporate dividend policy
D. Accounting standards
Answer: B. Terms of bond issue, covenants, and repayment provisions
Explanation: An indenture outlines the contract between the issuer and bondholders.
Q12.
Which bond has the lowest reinvestment risk?
A. 30-year coupon bond
B. 10-year coupon bond
C. 5-year coupon bond
D. Zero-coupon bond
Answer: D. Zero-coupon bond
Explanation: Since it pays no coupons, there’s no reinvestment risk; only final maturity value is received.
Q13.
A bond’s credit spread reflects:
A. The risk-free rate
B. The difference between government bond yields and corporate bond yields
C. Coupon rate minus inflation
D. The bond’s duration
Answer: B. The difference between government bond yields and corporate bond yields
Explanation: Credit spread compensates investors for the additional credit risk of non-government bonds.
Q14.
Which factor has the greatest impact on long-term bond prices?
A. Credit rating
B. Duration
C. Changes in interest rates
D. Maturity mismatch
Answer: C. Changes in interest rates
Explanation: For long-term fixed income, interest rate changes dominate price movements.
Q15.
What happens to a bond’s price if its YTM decreases?
A. Price decreases
B. Price increases
C. Price remains unchanged
D. Coupon rate decreases
Answer: B. Price increases
Explanation: Bond prices and yields move inversely.
Q16.
Treasury Inflation-Protected Securities (TIPS) adjust for:
A. Credit risk
B. Currency fluctuations
C. Inflation
D. Interest rate risk
Answer: C. Inflation
Explanation: TIPS’ principal is adjusted for inflation, protecting real returns.
Q17.
Which type of bond covenant restricts the issuer from taking on additional debt?
A. Affirmative covenant
B. Restrictive covenant
C. Positive covenant
D. Duration covenant
Answer: B. Restrictive covenant
Explanation: Restrictive covenants protect bondholders by limiting issuer’s additional debt capacity.
Q18.
Commercial paper typically has a maturity of:
A. Less than 1 year
B. 1–3 years
C. 3–5 years
D. More than 10 years
Answer: A. Less than 1 year
Explanation: Commercial paper is a short-term unsecured promissory note used for working capital.
Q19.
Which rating agencies are considered the “big three”?
A. S&P, Moody’s, Fitch
B. S&P, Moody’s, KPMG
C. Deloitte, Moody’s, Fitch
D. Ernst & Young, Fitch, Moody’s
Answer: A. S&P, Moody’s, Fitch
Explanation: These are the primary credit rating agencies globally.
Q20.
Which type of risk is unique to mortgage-backed securities?
A. Default risk
B. Prepayment risk
C. Interest rate risk
D. Credit risk
Answer: B. Prepayment risk
Explanation: Homeowners may repay mortgages early, affecting cash flows to MBS investors.
Q21.
The convexity of a bond measures:
A. The change in yield with price
B. The curvature in the price-yield relationship
C. Credit risk
D. Reinvestment risk
Answer: B. The curvature in the price-yield relationship
Explanation: Convexity improves accuracy of bond price changes for larger interest rate movements.
Q22.
Eurobonds are:
A. Bonds issued only in Europe
B. Bonds issued outside the country whose currency they are denominated in
C. Government-issued bonds
D. Bonds with floating coupons
Answer: B. Bonds issued outside the country whose currency they are denominated in
Explanation: Eurobonds may be denominated in any currency but are issued internationally.
Q23.
Which of the following is a money market instrument?
A. Treasury bill
B. Corporate bond
C. Convertible bond
D. Mortgage-backed security
Answer: A. Treasury bill
Explanation: Treasury bills are short-term government securities used in the money market.
Q24.
What happens to the price volatility of a bond as maturity increases?
A. Decreases
B. Increases
C. Stays constant
D. Becomes zero
Answer: B. Increases
Explanation: Longer maturities amplify interest rate sensitivity and price volatility.
Q25.
Which of the following is most sensitive to interest rate changes?
A. 1-year bond with a 10% coupon
B. 5-year bond with a 10% coupon
C. 10-year bond with a 10% coupon
D. 10-year zero-coupon bond
Answer: D. 10-year zero-coupon bond
Explanation: Zero-coupon bonds have the highest duration relative to coupon-paying bonds.
Q26.
Which bond feature gives investors protection against falling interest rates?
A. Call option
B. Put option
C. Convertible feature
D. Floating coupon
Answer: B. Put option
Explanation: A put option allows investors to sell the bond back to the issuer, beneficial if rates rise and prices fall.
Q27.
A floating-rate note typically has its coupon tied to:
A. Stock market returns
B. LIBOR or SOFR plus a spread
C. Inflation rate
D. Bond rating changes
Answer: B. LIBOR or SOFR plus a spread
Explanation: Floating-rate notes (FRNs) adjust coupons periodically based on a reference rate plus a spread.
Q28.
The yield spread between corporate bonds and government bonds primarily reflects:
A. Interest rate risk
B. Liquidity and credit risk
C. Duration risk
D. Inflation risk
Answer: B. Liquidity and credit risk
Explanation: Government bonds are considered risk-free benchmarks; spreads compensate for corporate risk factors.
Q29.
If a bond has a Macaulay duration of 8 years and yields rise by 0.5%, its approximate price change is:
A. –2%
B. –4%
C. –8%
D. –0.5%
Answer: B. –4%
Explanation: Price change ≈ –Duration × ΔYield = –8 × 0.5% = –4%.
Q30.
Which of the following is an advantage of securitization?
A. Increases borrower risk
B. Concentrates credit risk in one party
C. Provides liquidity to traditionally illiquid assets
D. Reduces market transparency
Answer: C. Provides liquidity to traditionally illiquid assets
Explanation: Securitization transforms assets like mortgages into tradeable securities.
Q31.
The clean price of a bond excludes:
A. Accrued interest
B. Quoted market price
C. Yield to maturity
D. Coupon rate
Answer: A. Accrued interest
Explanation: The clean price is the quoted bond price, excluding accrued interest.
Q32.
Which of the following best describes reinvestment risk?
A. Risk that coupons cannot be reinvested at the same rate as YTM
B. Risk that the issuer defaults on principal
C. Risk of early redemption
D. Risk from currency fluctuations
Answer: A. Risk that coupons cannot be reinvested at the same rate as YTM
Explanation: Reinvestment risk arises if future coupon reinvestment rates differ from the assumed YTM.
Q33.
Which bond is most exposed to reinvestment risk?
A. 1-year zero-coupon bond
B. 10-year bond with annual coupons
C. 20-year bond with semi-annual coupons
D. 30-year zero-coupon bond
Answer: C. 20-year bond with semi-annual coupons
Explanation: Long-term, frequent coupon-paying bonds have the highest reinvestment risk.
Q34.
An inverted yield curve most often signals:
A. Strong economic growth
B. Inflationary pressures
C. Economic slowdown or recession
D. High demand for credit
Answer: C. Economic slowdown or recession
Explanation: An inverted curve occurs when short-term yields exceed long-term yields, often predicting recessions.
Q35.
What type of bond is typically issued at a deep discount and matures at par?
A. Treasury bond
B. Zero-coupon bond
C. Floating-rate bond
D. Callable bond
Answer: B. Zero-coupon bond
Explanation: Zero-coupon bonds are issued below par and mature at face value, with no coupon payments.
Q36.
If a bond’s yield to maturity equals its coupon rate, the bond is priced at:
A. Premium
B. Discount
C. Par
D. Zero
Answer: C. Par
Explanation: When YTM = coupon rate, the bond trades at face value.
Q37.
Which of the following is NOT a common credit rating category?
A. Investment grade
B. Speculative grade
C. Default grade
D. Premium grade
Answer: D. Premium grade
Explanation: Ratings are broadly “investment grade” or “speculative/junk.” No category called “premium grade.”
Q38.
Collateralized debt obligations (CDOs) are:
A. Equity securities
B. Structured debt products backed by pools of loans or bonds
C. Government-issued bonds
D. Callable convertible bonds
Answer: B. Structured debt products backed by pools of loans or bonds
Explanation: CDOs pool different debt instruments and tranche them for investors with varying risk appetite.
Q39.
Which risk is most relevant for foreign currency-denominated bonds?
A. Currency risk
B. Duration risk
C. Liquidity risk
D. Credit spread risk
Answer: A. Currency risk
Explanation: Currency fluctuations affect investor returns in foreign-denominated debt.
Q40.
Which of the following is a benefit of high convexity in bonds?
A. Lower duration
B. Greater price appreciation when yields fall
C. Higher coupon payments
D. Reduced maturity
Answer: B. Greater price appreciation when yields fall
Explanation: Bonds with higher convexity gain more in price when rates drop and lose less when rates rise.
Q41.
The effective duration of a bond with embedded options is:
A. Equal to Macaulay duration
B. Always lower than modified duration
C. A measure of price sensitivity considering option exercise
D. Irrelevant for callable bonds
Answer: C. A measure of price sensitivity considering option exercise
Explanation: Effective duration accounts for potential option impacts on bond cash flows.
Q42.
What is the primary difference between debentures and secured bonds?
A. Debentures are backed by collateral
B. Debentures are unsecured, while secured bonds have collateral
C. Secured bonds pay higher yields
D. Secured bonds are always government-issued
Answer: B. Debentures are unsecured, while secured bonds have collateral
Explanation: Debentures rely on issuer creditworthiness; secured bonds are asset-backed.
Q43.
If the Fed increases interest rates, what happens to bond prices?
A. Increase
B. Decrease
C. Remain unchanged
D. Increase temporarily, then fall
Answer: B. Decrease
Explanation: Rising rates reduce bond demand, lowering prices.
Q44.
What type of bond allows investors to exchange the bond for equity shares?
A. Puttable bond
B. Callable bond
C. Convertible bond
D. Zero-coupon bond
Answer: C. Convertible bond
Explanation: Convertible bonds allow bondholders to convert debt into equity at predetermined terms.
Q45.
Which type of bond has the highest default risk?
A. Investment-grade corporate bond
B. Government bond
C. Junk bond
D. Treasury bill
Answer: C. Junk bond
Explanation: Junk bonds (below investment grade) carry the highest risk of default.
Q46.
What does “yield curve steepening” indicate?
A. Short-term yields rise faster than long-term yields
B. Long-term yields rise faster than short-term yields
C. Both long-term and short-term yields decline equally
D. Credit spreads narrow
Answer: B. Long-term yields rise faster than short-term yields
Explanation: Steepening reflects investor expectations of stronger growth and inflation.
Q47.
A sinking fund provision in bonds requires the issuer to:
A. Repay the entire principal at maturity
B. Make periodic payments to retire part of the debt before maturity
C. Issue new bonds annually
D. Guarantee conversion into equity
Answer: B. Make periodic payments to retire part of the debt before maturity
Explanation: Sinking funds reduce credit risk by ensuring partial repayments before maturity.
Q48.
What is the primary purpose of bond covenants?
A. Protect the issuer
B. Protect bondholders
C. Increase bond prices
D. Reduce market volatility
Answer: B. Protect bondholders
Explanation: Covenants impose restrictions on issuers to safeguard investor interests.
Q49.
Which of the following best describes “current yield”?
A. Annual coupon / Current market price
B. Coupon rate × Face value
C. Coupon rate / Yield to maturity
D. Current market price / Face value
Answer: A. Annual coupon / Current market price
Explanation: Current yield measures annual income relative to market price, not including capital gains/losses.
Q50.
Which factor primarily differentiates municipal bonds from corporate bonds?
A. Lower coupon rates
B. Tax-exempt status of interest (in many cases)
C. Higher credit risk
D. Longer maturity
Answer: B. Tax-exempt status of interest (in many cases)
Explanation: Municipal bond interest is often exempt from federal (and sometimes state/local) taxes.
Q51.
Which of the following best describes yield to maturity (YTM)?
A) The discount rate that equates the present value of future cash flows to the bond’s market price.
B) The expected return if the bond is sold before maturity.
C) The annual coupon rate fixed at issuance.
D) The risk-free rate adjusted for inflation.
Answer: A
Explanation: YTM is the internal rate of return (IRR) on a bond if held to maturity, assuming all coupons are reinvested at the same rate.
Q52.
A bond has a coupon of 6% paid semiannually, face value of $1,000, and 10 years to maturity. If its market price is $950, the bond is trading at:
A) Par
B) Premium
C) Discount
D) Fair value
Answer: C
Explanation: Since the bond’s price ($950) is below par ($1,000), it is trading at a discount.
Q53.
The duration of a bond is best interpreted as:
A) The weighted average time to receive the bond’s cash flows.
B) The bond’s maturity date.
C) The risk-free rate over the bond’s life.
D) The longest coupon period.
Answer: A
Explanation: Duration measures interest rate sensitivity and represents the weighted average time to receive cash flows.
Q54.
If interest rates rise, the price of an existing fixed-rate bond will:
A) Increase
B) Decrease
C) Remain unchanged
D) Increase only if bond is callable
Answer: B
Explanation: Bond prices and interest rates are inversely related. A rise in interest rates causes bond prices to fall.
Q55.
A bond has a duration of 5 years. If yields increase by 1%, the bond’s price will approximately:
A) Rise by 5%
B) Fall by 5%
C) Remain the same
D) Fall by 10%
Answer: B
Explanation: Duration estimates percentage price change: Price change ≈ –Duration × ΔYield.
Q56.
The difference between yield spread and credit spread is that:
A) Yield spread includes only default risk.
B) Credit spread compares corporate bond yields to government bond yields.
C) Yield spread refers to duration, while credit spread refers to convexity.
D) Credit spread is independent of bond risk.
Answer: B
Explanation: Credit spread = corporate bond yield – risk-free bond yield of same maturity.
Q57.
Which type of bond is most sensitive to changes in interest rates?
A) Short-term, high-coupon bond
B) Long-term, low-coupon bond
C) Medium-term, zero-coupon bond
D) Floating-rate bond
Answer: B
Explanation: Duration is higher for long-term, low-coupon bonds, making them more interest-rate sensitive.
Q58.
If a bond’s convexity is positive, it means:
A) Price increases are larger when yields fall than price decreases when yields rise.
B) Price decreases are larger when yields rise than price increases when yields fall.
C) The bond has zero reinvestment risk.
D) Duration remains constant.
Answer: A
Explanation: Positive convexity benefits bondholders because price gains are greater than price losses for equal yield changes.
Q59.
Which of the following bonds has zero reinvestment risk?
A) 10-year coupon bond
B) Perpetual bond
C) Zero-coupon bond
D) Callable bond
Answer: C
Explanation: Zero-coupon bonds eliminate reinvestment risk because there are no coupon payments to reinvest.
Q60.
A U.S. Treasury bond and a corporate bond with the same maturity differ in yield because of:
A) Liquidity risk and credit risk
B) Identical default risk
C) Tax exemption on corporate bonds
D) Currency risk
Answer: A
Explanation: Corporate bonds carry additional credit risk and lower liquidity, which leads to higher yields compared to Treasury bonds.
Question 61
A 10-year bond has a coupon rate of 6% paid annually. If the market yield rises from 6% to 7%, the bond’s price will:
A. Increase
B. Decrease
C. Remain unchanged
D. Double
✅ Answer: B. Decrease
Explanation: When yields rise, bond prices fall due to the inverse price-yield relationship. The bond was priced at par when yield = coupon (6%). At 7%, its present value falls below par.
Question 62
A 5-year zero-coupon bond has a yield to maturity (YTM) of 5%. Its price will be closest to:
A. 783.53
B. 822.70
C. 956.45
D. 1000.00
✅ Answer: B. 822.70
Explanation: Price = FV / (1+YTM)^n = 1000 / (1.05)^5 = 822.70.
Question 63
Which of the following bonds has the highest interest rate risk?
A. 30-year zero-coupon bond
B. 10-year coupon bond with 8% coupon
C. 1-year Treasury bill
D. 5-year corporate bond with 6% coupon
✅ Answer: A. 30-year zero-coupon bond
Explanation: Long maturities and zero coupons create maximum sensitivity to yield changes (highest duration).
Question 64
Which yield measure assumes all coupon payments are reinvested at the bond’s yield to maturity?
A. Nominal yield
B. Current yield
C. Yield to maturity (YTM)
D. Holding period return
✅ Answer: C. Yield to maturity (YTM)
Explanation: YTM assumes reinvestment of coupons at the same yield until maturity.
Question 65
A bond has Macaulay duration of 7 years. If yields increase by 1%, the bond’s price will approximately:
A. Rise by 7%
B. Fall by 7%
C. Fall by 0.7%
D. Remain unchanged
✅ Answer: B. Fall by 7%
Explanation: Duration estimates price sensitivity. For small changes, ΔP/P ≈ -Duration × Δy.
Question 66
Callable bonds usually offer:
A. Lower coupon rates than comparable non-callable bonds
B. Higher coupon rates than comparable non-callable bonds
C. The same coupon rate as comparable bonds
D. Zero coupons
✅ Answer: B. Higher coupon rates
Explanation: Investors demand compensation (higher yield/coupon) for call risk (issuer may redeem early).
Question 67
The yield curve is upward sloping. This usually indicates:
A. Future inflation expectations
B. Lower future interest rates
C. Economic recession
D. Credit downgrades
✅ Answer: A. Future inflation expectations
Explanation: An upward yield curve reflects expectations of higher rates due to anticipated inflation and economic growth.
Question 68
Which of the following most reduces credit risk in corporate bonds?
A. Subordination
B. Collateral backing
C. Longer maturities
D. Callable features
✅ Answer: B. Collateral backing
Explanation: Collateral provides asset support, reducing investor credit risk.
Question 69
A bond sells for $950 with a $1,000 face value and 5% annual coupon. Its current yield is:
A. 4.75%
B. 5.00%
C. 5.26%
D. 10.53%
✅ Answer: C. 5.26%
Explanation: Current yield = Annual coupon / Price = 50 / 950 = 5.26%.
Question 70
Which measure best captures a bond’s sensitivity to small changes in yield?
A. Duration
B. Convexity
C. Current yield
D. Nominal yield
✅ Answer: A. Duration
Explanation: Duration is the primary measure of price sensitivity to interest rate changes. Convexity improves accuracy for large changes.
Question 71
Which of the following securities has no reinvestment risk?
A. 10-year coupon bond
B. Zero-coupon bond
C. Floating-rate note
D. Callable bond
✅ Answer: B. Zero-coupon bond
Explanation: No interim coupon payments → no reinvestment required.
Question 72
Which of the following is a money market instrument?
A. Treasury bill
B. 30-year Treasury bond
C. Corporate debenture
D. Convertible bond
✅ Answer: A. Treasury bill
Explanation: T-bills are short-term (less than 1 year) money market securities.
Question 73
The relationship between bond price and yield is:
A. Linear and positive
B. Linear and negative
C. Convex and negative
D. Convex and positive
✅ Answer: C. Convex and negative
Explanation: Bond price-yield relationship is negatively sloped and convex.
Question 74
A company issues subordinated debentures. This means:
A. They are backed by collateral
B. They rank below senior debt in claims
C. They pay higher coupons than equity
D. They have priority over all liabilities
✅ Answer: B. They rank below senior debt in claims
Explanation: Subordinated debentures are unsecured and lower in claim priority.
Question 75
Which type of bond is most likely to have extension risk?
A. Mortgage-backed securities (MBS)
B. Zero-coupon bonds
C. Treasury notes
D. Convertible bonds
✅ Answer: A. Mortgage-backed securities (MBS)
Explanation: If interest rates rise, prepayments slow down → investors face extension risk.
Question 76
If a bond’s yield to maturity is less than its coupon rate, the bond is trading:
A. At par
B. At a discount
C. At a premium
D. Below intrinsic value
✅ Answer: C. At a premium
Explanation: When YTM < coupon rate → price > par value.
Question 77
Which of the following is a credit enhancement technique?
A. Duration
B. Credit default swaps (CDS)
C. Convexity
D. Yield spread analysis
✅ Answer: B. Credit default swaps (CDS)
Explanation: CDS provide insurance against credit events → enhance creditworthiness.
Question 78
Bond convexity is important because:
A. It measures default risk
B. It improves duration estimates for large yield changes
C. It measures reinvestment risk
D. It predicts credit spreads
✅ Answer: B. It improves duration estimates
Explanation: Convexity captures curvature of price-yield relationship, refining duration estimates.
Question 79
Which of the following bonds has the lowest yield spread relative to Treasuries?
A. AAA-rated corporate bond
B. BBB-rated corporate bond
C. Junk bond
D. Distressed debt
✅ Answer: A. AAA-rated corporate bond
Explanation: Higher-rated bonds have narrower spreads due to lower risk.
Question 80
If interest rates are expected to fall, an investor should prefer:
A. Short-duration bonds
B. Callable bonds
C. Long-duration bonds
D. Floating-rate bonds
✅ Answer: C. Long-duration bonds
Explanation: Longer durations benefit most from falling yields (larger price gains).
🔹 That’s 61–80.
👉 Do you want me to continue 81–100 now in the same polished style (so we complete the Fixed Income section before SEO + Master Post)?
Alright 👍 let’s continue with the final set for CFA Level 1 Fixed Income (81–100).
📘 CFA Level 1 Fixed Income – Practice MCQs (81–100)
Question 81
Which of the following bonds has the highest reinvestment risk?
A. 10-year zero-coupon bond
B. 10-year 8% coupon bond
C. 5-year zero-coupon bond
D. 30-year Treasury STRIP
✅ Answer: B. 10-year 8% coupon bond
Explanation: Higher coupons = more interim cash flows that must be reinvested, increasing reinvestment risk.
Question 82
An upward-sloping yield curve most likely reflects:
A. Expected increase in short-term rates
B. Expected decrease in long-term rates
C. A credit downgrade
D. A steep decline in inflation
✅ Answer: A. Expected increase in short-term rates
Explanation: According to the expectations theory, an upward curve suggests markets expect higher future short-term rates.
Question 83
Which spread is most useful for comparing bonds with embedded options?
A. Nominal spread
B. Zero-volatility spread (Z-spread)
C. Option-adjusted spread (OAS)
D. TED spread
✅ Answer: C. Option-adjusted spread (OAS)
Explanation: OAS removes the effect of embedded options, making bonds comparable.
Question 84
Which of the following is most likely to reduce liquidity risk in bond markets?
A. High trading volume
B. Low ratings
C. Longer maturities
D. Embedded call features
✅ Answer: A. High trading volume
Explanation: Liquid markets with active trading reduce liquidity risk.
Question 85
A bond priced at 92.50 (per 100 par) is said to be trading at:
A. A discount
B. A premium
C. At par
D. Above yield
✅ Answer: A. A discount
Explanation: Price below par (100) = discount bond.
Question 86
If market interest rates rise, which type of bond will show the greatest percentage price decline?
A. Short-term coupon bond
B. Long-term coupon bond
C. Perpetual bond
D. Floating-rate note
✅ Answer: C. Perpetual bond
Explanation: Perpetual bonds have infinite maturity → highest duration and sensitivity to rates.
Question 87
A floating-rate bond resets its coupon every 6 months to LIBOR + 150 bps. If 6M LIBOR rises from 2% to 4%, the next coupon will be:
A. 2%
B. 4%
C. 5.5%
D. 6%
✅ Answer: C. 5.5%
Explanation: Coupon = 4% + 1.5% = 5.5%.
Question 88
What happens to the yield spread during times of financial crisis?
A. It narrows
B. It remains unchanged
C. It widens
D. It inverts
✅ Answer: C. It widens
Explanation: Investors demand higher risk premium, increasing spreads.
Question 89
Which of the following best explains negative convexity?
A. Price rises more slowly as yields fall
B. Price rises faster as yields fall
C. Price is insensitive to yield
D. Yield curve flattens
✅ Answer: A. Price rises more slowly as yields fall
Explanation: Bonds with call options exhibit negative convexity when price gains are capped as rates fall.
Question 90
Which bond will experience the least volatility in price due to interest rate changes?
A. 30-year Treasury bond
B. 10-year municipal bond
C. 1-year Treasury bill
D. 20-year corporate bond
✅ Answer: C. 1-year Treasury bill
Explanation: Short maturity → low duration → least sensitivity to rates.
Question 91
The clean price of a bond is:
A. Price including accrued interest
B. Price excluding accrued interest
C. Always equal to face value
D. Coupon × Yield
✅ Answer: B. Price excluding accrued interest
Explanation: Quoted price (clean) excludes accrued interest; dirty price = clean + accrued.
Question 92
Which of the following best describes credit spread risk?
A. Risk that issuer defaults
B. Risk that difference between corporate and Treasury yields widens
C. Risk that yield curve steepens
D. Risk of inflation rising
✅ Answer: B. Spread widening risk
Explanation: Credit spread risk arises when yield spreads over Treasuries widen.
Question 93
Which bond is most exposed to prepayment risk?
A. Treasury STRIPS
B. Mortgage-backed security (MBS)
C. Convertible corporate bond
D. Subordinated debenture
✅ Answer: B. Mortgage-backed security (MBS)
Explanation: Borrowers may repay early if rates fall, creating prepayment risk.
Question 94
What type of bond is most likely to be issued at a deep discount?
A. Zero-coupon bond
B. Floating-rate bond
C. Callable bond
D. Perpetual bond
✅ Answer: A. Zero-coupon bond
Explanation: Zero-coupon bonds are sold at deep discounts since they pay no coupons.
Question 95
Which duration measure is used for bonds with embedded options?
A. Macaulay duration
B. Modified duration
C. Effective duration
D. Dollar duration
✅ Answer: C. Effective duration
Explanation: Effective duration accounts for changes in cash flows from embedded options.
Question 96
A bond portfolio manager wants to hedge against interest rate risk. The most appropriate tool is:
A. Credit default swaps
B. Interest rate swaps
C. Equity derivatives
D. Short-selling equities
✅ Answer: B. Interest rate swaps
Explanation: Swaps allow managers to exchange fixed vs. floating payments to manage exposure.
Question 97
Which of the following is a form of securitization?
A. Treasury bills
B. Mortgage-backed securities
C. Government bonds
D. Corporate debentures
✅ Answer: B. Mortgage-backed securities
Explanation: Securitization pools assets (like mortgages) into tradable securities.
Question 98
Which bondholder has the highest claim priority in bankruptcy?
A. Common shareholders
B. Subordinated debenture holders
C. Secured bondholders
D. Preferred shareholders
✅ Answer: C. Secured bondholders
Explanation: Secured debt holders have first claim on collateralized assets.
Question 99
A bond trades at a yield spread of 150 bps over Treasuries. If Treasuries yield 4%, the bond’s YTM is:
A. 4%
B. 5.5%
C. 6%
D. 2.5%
✅ Answer: B. 5.5%
Explanation: YTM = Treasury yield + spread = 4% + 1.5% = 5.5%.
Question 100
Which of the following factors increases a bond’s convexity?
A. Short maturity, high coupon
B. Long maturity, low coupon
C. Floating rates
D. Callable features
✅ Answer: B. Long maturity, low coupon
Explanation: Longer maturities and lower coupons → greater convexity.
Question 101
Which of the following is a characteristic of a collateralized mortgage obligation (CMO)?
a) Equal cash flows across tranches
b) Divides cash flows into tranches with different maturities and risk profiles
c) Always guarantees prepayment protection
d) Pays only interest but not principal
Answer: b) Divides cash flows into tranches with different maturities and risk profiles
Explanation: CMOs redistribute mortgage cash flows into tranches with varying risk, maturity, and prepayment sensitivity.
Question 102
What is the key risk in mortgage-backed securities (MBS)?
a) Reinvestment risk
b) Liquidity risk
c) Prepayment risk
d) Political risk
Answer: c) Prepayment risk
Explanation: Borrowers may repay mortgages earlier than expected, affecting cash flow timing and valuation.
Question 103
Which bond feature most reduces credit risk for investors?
a) Callable option
b) Put option
c) Sinking fund provision
d) Step-up coupon
Answer: c) Sinking fund provision
Explanation: A sinking fund requires issuers to retire debt gradually, lowering default probability.
Question 104
A step-up bond is best described as:
a) A bond whose coupon decreases over time
b) A bond that adjusts coupon based on inflation
c) A bond with a coupon that increases at scheduled intervals
d) A bond with fixed coupons throughout
Answer: c) A bond with a coupon that increases at scheduled intervals
Explanation: Step-up bonds gradually increase coupon payments at pre-defined dates.
Question 105
Which of the following is a pass-through security?
a) Collateralized debt obligation (CDO)
b) Mortgage-backed security (MBS)
c) Asset-backed commercial paper (ABCP)
d) Treasury STRIPS
Answer: b) Mortgage-backed security (MBS)
Explanation: In MBS, principal and interest payments “pass through” from borrowers to investors.
Question 106
What does duration primarily measure?
a) Convexity
b) Interest rate sensitivity
c) Credit spread risk
d) Yield curve slope
Answer: b) Interest rate sensitivity
Explanation: Duration estimates how bond prices change with interest rate movements.
Question 107
A bond has a duration of 6 years. If interest rates rise by 1%, the bond’s price will approximately:
a) Increase by 6%
b) Decrease by 6%
c) Increase by 0.6%
d) Decrease by 0.6%
Answer: b) Decrease by 6%
Explanation: Duration gives the approximate percentage change in bond price for a 1% change in yield.
Question 108
Which security type typically has the lowest credit risk?
a) Corporate bonds
b) Municipal bonds
c) Treasury securities
d) Asset-backed securities
Answer: c) Treasury securities
Explanation: Treasuries are backed by the U.S. government, making them essentially default risk-free.
Question 109
What is the effect of positive convexity on bond prices?
a) Price decreases are greater than price increases for yield changes
b) Price increases are greater than price decreases for yield changes
c) Bond price becomes insensitive to yield changes
d) Bond prices remain constant regardless of yields
Answer: b) Price increases are greater than price decreases for yield changes
Explanation: Positive convexity benefits investors because bond prices rise more when yields fall than they fall when yields rise.
Question 110
Which of the following is most sensitive to interest rate risk?
a) A 1-year Treasury bill
b) A 10-year zero-coupon bond
c) A 10-year coupon bond
d) A 5-year floating-rate bond
Answer: b) A 10-year zero-coupon bond
Explanation: Long maturity + no coupon payments = highest sensitivity to rate changes.
Question 131
Which type of yield curve is most consistent with an economic expansion?
a) Flat
b) Inverted
c) Normal, upward sloping
d) Humped
Answer: c) Normal, upward sloping
Explanation: A normal yield curve reflects expectations of higher growth and inflation.
Question 132
What does a credit default swap (CDS) provide?
a) Protection against interest rate risk
b) Protection against default risk
c) Inflation protection
d) Currency hedging
Answer: b) Protection against default risk
Explanation: A CDS is a contract that pays the buyer if the reference bond defaults.
Question 133
Which bond is most sensitive to interest rate changes?
a) 30-year zero-coupon bond
b) 10-year floating-rate bond
c) 5-year Treasury note
d) 2-year coupon bond
Answer: a) 30-year zero-coupon bond
Explanation: Longer maturity and no coupons → highest duration and sensitivity.
Question 134
What is the main disadvantage of callable bonds for investors?
a) Lower credit risk
b) Higher reinvestment risk
c) Lower liquidity
d) No coupon payments
Answer: b) Higher reinvestment risk
Explanation: When rates fall, issuer may call the bond, forcing reinvestment at lower rates.
Question 135
Which risk measure considers bond convexity in addition to duration?
a) Effective duration
b) Modified duration
c) Effective convexity
d) Yield spread
Answer: c) Effective convexity
Explanation: Convexity adjusts for curvature in price-yield relationship, especially for large rate changes.
Question 136
Which feature is most likely included in a covered bond?
a) Backed by pool of assets that stay on issuer’s balance sheet
b) Backed by pool of assets transferred off-balance sheet
c) Zero default risk
d) Backed only by government guarantee
Answer: a) Backed by pool of assets that stay on issuer’s balance sheet
Explanation: Covered bonds remain on the issuer’s balance sheet, unlike securitized MBS.
Question 137
Which type of security is a pass-through structure?
a) Callable bond
b) Mortgage-backed security
c) Convertible bond
d) Treasury bond
Answer: b) Mortgage-backed security
Explanation: Pass-through securities forward principal and interest cash flows directly to investors.
Question 138
What is the primary source of credit risk in corporate bonds?
a) Interest rate changes
b) Default or downgrade by rating agencies
c) Liquidity mismatch
d) Reinvestment
Answer: b) Default or downgrade by rating agencies
Explanation: Corporate bond investors face risk of default and rating downgrades that widen spreads.
Question 139
Which type of spread adjusts for the timing of cash flows?
a) Nominal spread
b) Z-spread
c) OAS (Option-adjusted spread)
d) TED spread
Answer: b) Z-spread
Explanation: The zero-volatility spread accounts for all spot rates across maturities, adjusting for cash flow timing.
Question 140
Which bond is least likely to face prepayment risk?
a) Agency MBS
b) Collateralized mortgage obligation
c) Corporate bond
d) Auto loan ABS
Answer: c) Corporate bond
Explanation: Prepayment risk is unique to securities backed by loans (MBS/ABS), not plain corporate bonds.
Question 141
A bond with higher convexity compared to another bond will:
a) Lose more when yields rise
b) Gain less when yields fall
c) Perform better in volatile interest rate environments
d) Always trade at par
Answer: c) Perform better in volatile interest rate environments
Explanation: Higher convexity cushions price drops and amplifies gains during large rate changes.
Question 142
Which yield measure is most appropriate for a bond with embedded options?
a) Current yield
b) Yield to maturity
c) Effective yield
d) Option-adjusted spread (OAS)
Answer: d) Option-adjusted spread (OAS)
Explanation: OAS removes the value of embedded options to allow comparison across securities.
Question 143
What is the most liquid fixed-income market in the world?
a) Corporate bond market
b) Treasury market (U.S.)
c) Mortgage-backed securities market
d) Municipal bond market
Answer: b) Treasury market (U.S.)
Explanation: U.S. Treasuries are the most liquid and widely traded fixed-income securities.
Question 144
Which statement is true about high-yield bonds?
a) They are less affected by the business cycle
b) They are more sensitive to credit risk than interest rate risk
c) They are safer than Treasuries
d) They trade at tight spreads
Answer: b) They are more sensitive to credit risk than interest rate risk
Explanation: High-yield bonds’ performance depends heavily on issuer solvency, not interest rates.
Question 145
Which measure captures credit migration risk?
a) Downgrade probability
b) Z-spread
c) Duration
d) Liquidity premium
Answer: a) Downgrade probability
Explanation: Credit migration risk is the chance of a bond being downgraded, widening spreads and lowering prices.
Question 146
Which type of security is most likely to have a planned amortization class (PAC)?
a) Treasury note
b) Corporate bond
c) Collateralized mortgage obligation (CMO)
d) Eurobond
Answer: c) Collateralized mortgage obligation (CMO)
Explanation: PAC tranches provide more predictable cash flows by absorbing prepayment variability.
Question 147
Which yield curve theory states that forward rates are unbiased predictors of future spot rates?
a) Liquidity preference theory
b) Market segmentation theory
c) Expectations theory
d) Preferred habitat theory
Answer: c) Expectations theory
Explanation: Pure expectations theory assumes forward rates reflect expected future spot rates.
Question 148
What happens to the duration of a mortgage-backed security when interest rates rise?
a) Duration increases (extension risk)
b) Duration decreases
c) Duration remains constant
d) Duration becomes negative
Answer: a) Duration increases (extension risk)
Explanation: Rising rates slow prepayments → extending cash flows → higher duration.
Question 149
Which is the biggest risk for floating-rate notes (FRNs)?
a) Interest rate risk
b) Credit risk
c) Liquidity risk
d) Inflation risk
Answer: b) Credit risk
Explanation: Since coupons adjust with rates, FRNs are less exposed to interest rate risk but still face credit risk.
Question 150
Which spread is most appropriate to compare securities with and without embedded options?
a) Z-spread
b) Nominal spread
c) OAS
d) TED spread
Answer: c) OAS
Explanation: Option-adjusted spread removes option effects, making securities comparable.
Question 151
Which type of bond is most likely to have negative convexity?
a) Zero-coupon bonds
b) Callable bonds
c) Treasury bills
d) Corporate bonds
Answer: b) Callable bonds
Explanation: Callable bonds may lose convexity when rates fall because the issuer is likely to call them.
Question 152
What does a steepening yield curve typically indicate?
a) Strong economic growth expectations
b) Economic slowdown
c) Lower inflation expectations
d) Recession risk
Answer: a) Strong economic growth expectations
Explanation: A steep curve reflects expectations of higher growth and inflation.
Question 153
Which of the following best defines yield spread risk?
a) Risk that credit spreads may widen, reducing bond prices
b) Risk of changes in Treasury yields
c) Risk of early prepayments
d) Risk of inflation increasing
Answer: a) Risk that credit spreads may widen, reducing bond prices
Explanation: Yield spread risk is linked to credit risk and investor sentiment.
Question 154
Which bond structure reduces extension risk?
a) Support tranches in CMOs
b) Planned amortization class (PAC) tranches
c) Callable bonds
d) Floating-rate notes
Answer: b) Planned amortization class (PAC) tranches
Explanation: PAC tranches provide predictable principal repayment, limiting extension risk.
Question 155
Which risk is most relevant for inflation-linked bonds?
a) Credit risk
b) Real interest rate risk
c) Inflation risk
d) Default risk
Answer: b) Real interest rate risk
Explanation: Inflation-linked bonds protect against inflation but are still exposed to real interest rate changes.
Question 156
What does the TED spread measure?
a) Risk premium of corporate bonds over Treasuries
b) Difference between Eurodollar and Treasury bill rates
c) Risk premium of junk bonds
d) Inflation expectations
Answer: b) Difference between Eurodollar and Treasury bill rates
Explanation: TED spread reflects banking sector credit risk.
Question 157
Which type of security is most exposed to prepayment risk?
a) Collateralized mortgage obligations
b) U.S. Treasuries
c) Corporate bonds
d) Eurobonds
Answer: a) Collateralized mortgage obligations
Explanation: Mortgage-related securities are highly sensitive to prepayments.
Question 158
What is the main purpose of a Treasury Inflation-Protected Security (TIPS)?
a) Eliminate reinvestment risk
b) Provide guaranteed real return
c) Protect against default risk
d) Reduce currency risk
Answer: b) Provide guaranteed real return
Explanation: TIPS adjust principal with inflation, preserving real purchasing power.
Question 159
Which duration measure is most accurate for bonds with embedded options?
a) Macaulay duration
b) Modified duration
c) Effective duration
d) Spread duration
Answer: c) Effective duration
Explanation: Effective duration accounts for option-related cash flow changes.
Question 160
A bond is trading below par. This suggests that:
a) Coupon rate < market yield
b) Coupon rate > market yield
c) Coupon rate = market yield
d) Yield curve is inverted
Answer: a) Coupon rate < market yield
Explanation: When the coupon is lower than the market yield, the bond trades at a discount.
Question 161
Which type of bond structure is least sensitive to reinvestment risk?
a) Zero-coupon bond
b) Callable bond
c) Floating-rate note
d) Mortgage-backed security
Answer: a) Zero-coupon bond
Explanation: Zero-coupon bonds eliminate reinvestment risk since no coupons are paid.
Question 162
What happens when credit spreads tighten?
a) Bond prices rise
b) Bond prices fall
c) Yields increase
d) Risk increases
Answer: a) Bond prices rise
Explanation: Narrower spreads reduce required yield → higher prices.
Question 163
Which of the following is an index-linked bond?
a) Municipal bond
b) Treasury STRIP
c) Inflation-linked bond
d) Callable bond
Answer: c) Inflation-linked bond
Explanation: Index-linked bonds adjust principal/coupon with an index, often inflation.
Question 164
Which factor is most relevant for municipal bonds?
a) Tax treatment
b) Call risk
c) Inflation protection
d) Negative convexity
Answer: a) Tax treatment
Explanation: Municipal bonds are attractive due to tax-exempt interest income.
Question 165
Which is true about Eurobonds?
a) Always issued in euros
b) Issued outside the jurisdiction of any one country
c) Guaranteed by the ECB
d) Short maturity only
Answer: b) Issued outside the jurisdiction of any one country
Explanation: Eurobonds are bonds issued in a currency different from the country of issue.
Question 166
Which bond has the highest reinvestment risk?
a) 30-year high-coupon bond
b) 30-year zero-coupon bond
c) 10-year Treasury STRIP
d) 5-year discount bond
Answer: a) 30-year high-coupon bond
Explanation: More coupon cash flows → higher reinvestment risk.
Question 167
Which yield curve movement increases barbell portfolio performance?
a) Parallel shift
b) Steepening
c) Flattening
d) Inversion
Answer: c) Flattening
Explanation: Barbell portfolios benefit when long rates fall relative to short rates (flattening).
Question 168
What is the main risk of subordinated debt?
a) Higher interest rate sensitivity
b) Lower credit ranking in case of default
c) Higher liquidity risk
d) No coupon payments
Answer: b) Lower credit ranking in case of default
Explanation: Subordinated debt holders are paid after senior debt holders.
Question 169
Which is true about covered bonds?
a) Backed by a pool of mortgages that remain on issuer’s balance sheet
b) Always guaranteed by the government
c) Cannot default
d) Are tax-free securities
Answer: a) Backed by a pool of mortgages that remain on issuer’s balance sheet
Explanation: Covered bonds differ from securitizations because collateral stays on balance sheet.
Question 170
Which of the following is most consistent with liquidity preference theory?
a) Upward-sloping yield curve due to higher risk premium for long maturities
b) Flat yield curve always
c) Forward rates equal expected future spot rates
d) Segmentation of bond investors
Answer: a) Upward-sloping yield curve due to higher risk premium for long maturities
Explanation: Investors require a liquidity premium to hold longer maturities.
Question 171
Which risk is highest for mortgage pass-through securities when interest rates fall?
a) Extension risk
b) Prepayment risk
c) Credit risk
d) Inflation risk
Answer: b) Prepayment risk
Explanation: Falling rates encourage borrowers to refinance → prepayments accelerate.
Question 172
Which bond measure isolates credit risk premium?
a) OAS
b) Duration
c) Convexity
d) YTM
Answer: a) OAS
Explanation: Option-adjusted spread reflects credit risk after adjusting for options.
Question 173
Which bond structure is most affected by contraction risk?
a) Zero-coupon bond
b) Mortgage-backed security
c) Floating-rate note
d) Municipal bond
Answer: b) Mortgage-backed security
Explanation: Falling rates → early repayments → cash flows contract.
Question 174
Which index tracks U.S. investment-grade corporate bonds?
a) S&P 500
b) Bloomberg Barclays U.S. Corporate Bond Index
c) Dow Jones Bond Index
d) Wilshire 5000
Answer: b) Bloomberg Barclays U.S. Corporate Bond Index
Explanation: This is the main benchmark for investment-grade corporate bonds.
Question 175
Which risk is reduced by portfolio diversification across issuers?
a) Systematic interest rate risk
b) Unsystematic credit risk
c) Inflation risk
d) Market risk
Answer: b) Unsystematic credit risk
Explanation: Issuer-specific default risk can be diversified away.
Question 176
Which is a secured bond?
a) Debenture
b) Mortgage bond
c) Subordinated note
d) Eurobond
Answer: b) Mortgage bond
Explanation: Mortgage bonds are backed by real estate collateral, making them secured.
Question 177
What does a credit default swap (CDS) provide?
a) Protection against rising interest rates
b) Insurance against bond default
c) Guarantee of coupon reinvestment
d) Inflation hedging
Answer: b) Insurance against bond default
Explanation: CDS allows investors to transfer default risk of a bond.
Question 178
Which factor most influences high-yield bonds?
a) Interest rate risk
b) Credit risk
c) Inflation expectations
d) Currency risk
Answer: b) Credit risk
Explanation: High-yield (junk) bonds are primarily driven by credit quality.
Question 179
Which is a typical feature of catastrophe bonds (CAT bonds)?
a) Triggered by natural disaster losses
b) Issued only by governments
c) Zero-coupon structure
d) Always AAA rated
Answer: a) Triggered by natural disaster losses
Explanation: CAT bonds reduce insurer risk by transferring catastrophe risk to investors.
Question 180
What is the main benefit of bond immunization?
a) Eliminates inflation risk
b) Locks in a target rate of return regardless of interest rate changes
c) Protects against default
d) Guarantees liquidity
Answer: b) Locks in a target rate of return regardless of interest rate changes
Explanation: Immunization matches asset duration with liability duration.
Question 181
Which risk is most relevant for floating-rate notes?
a) Market risk
b) Credit risk
c) Basis risk
d) Reinvestment risk
Answer: c) Basis risk
Explanation: FRNs may not perfectly track reference rates, creating basis risk.
Question 182
What is the primary risk of investing in emerging market bonds?
a) Prepayment risk
b) Sovereign risk
c) Inflation risk
d) Duration risk
Answer: b) Sovereign risk
Explanation: Emerging market bonds face country-level default and political instability.
Question 183
Which is true about Treasury STRIPS?
a) Pay only coupons
b) Separate principal and coupon payments
c) Issued only by corporations
d) Have no interest rate risk
Answer: b) Separate principal and coupon payments
Explanation: STRIPS are zero-coupon securities created by stripping Treasuries.
Question 184
Which spread is most useful for MBS analysis?
a) Z-spread
b) OAS (Option Adjusted Spread)
c) G-spread
d) TED spread
Answer: b) OAS (Option Adjusted Spread)
Explanation: OAS accounts for embedded options in mortgage-backed securities.
Question 185
Which describes fallen angels?
a) Bonds upgraded to investment grade
b) High-yield bonds returning to par
c) Bonds downgraded from investment grade to junk status
d) Bonds trading below 50% of par
Answer: c) Bonds downgraded from investment grade to junk status
Explanation: Fallen angels are downgraded corporate bonds.
Question 186
Which is a feature of perpetual bonds?
a) Fixed maturity date
b) No maturity date
c) Callable only
d) Zero coupon
Answer: b) No maturity date
Explanation: Perpetual bonds pay interest indefinitely without repayment of principal.
Question 187
Which type of bond is most affected by inflation risk?
a) Treasury Inflation-Protected Security (TIPS)
b) Zero-coupon bond
c) Corporate bond
d) Fixed-rate bond
Answer: d) Fixed-rate bond
Explanation: Fixed cash flows lose purchasing power during inflation.
Question 188
What is the main role of credit rating agencies in bond markets?
a) Eliminate credit risk
b) Provide liquidity
c) Assess default probability of issuers
d) Set bond prices
Answer: c) Assess default probability of issuers
Explanation: Agencies provide independent ratings to help investors assess credit risk.
Question 189
Which factor most drives municipal bond yields?
a) Tax-exempt status
b) Duration
c) Global interest rates
d) Inflation
Answer: a) Tax-exempt status
Explanation: Investors accept lower yields for tax advantages of municipal bonds.
Question 190
What is the main disadvantage of callable bonds for investors?
a) Higher coupon
b) Lower convexity
c) Reinvestment risk if called early
d) Higher liquidity
Answer: c) Reinvestment risk if called early
Explanation: If called, investors must reinvest at lower yields.
Question 191
Which bond is least liquid?
a) On-the-run U.S. Treasury
b) Off-the-run U.S. Treasury
c) Corporate bond
d) Municipal bond
Answer: b) Off-the-run U.S. Treasury
Explanation: New (on-the-run) issues are more liquid than older Treasuries.
Question 192
Which bondholder has the highest claim in bankruptcy?
a) Subordinated debenture holder
b) Preferred shareholder
c) Senior secured bondholder
d) Common shareholder
Answer: c) Senior secured bondholder
Explanation: Senior secured creditors are first in line during liquidation.
Question 193
What does a credit spread widening indicate?
a) Improving credit conditions
b) Worsening credit risk perception
c) Stable market sentiment
d) Lower expected volatility
Answer: b) Worsening credit risk perception
Explanation: Wider spreads = higher compensation required for risk.
Question 194
Which describes yield-to-worst (YTW)?
a) Yield under best-case scenario
b) Lowest yield assuming call/put options exercised
c) Average yield of callable bonds
d) Benchmark yield spread
Answer: b) Lowest yield assuming call/put options exercised
Explanation: YTW ensures conservative return expectations.
Question 195
Which is true about inflation-indexed bonds?
a) Coupon adjusts for inflation
b) Principal adjusts for inflation
c) Both coupon and principal adjust
d) Neither adjusts
Answer: c) Both coupon and principal adjust
Explanation: Both components adjust based on inflation index.
Question 196
Which type of bond has payment-in-kind (PIK) feature?
a) Government bond
b) Distressed bond
c) Corporate high-yield bond
d) Inflation-linked bond
Answer: c) Corporate high-yield bond
Explanation: PIK bonds allow issuers to pay interest in additional bonds instead of cash.
Question 197
Which best describes a sinking fund provision?
a) Issuer repays part of debt periodically
b) Investors redeem bond early
c) Coupon resets with LIBOR
d) Bond matures at call date
Answer: a) Issuer repays part of debt periodically
Explanation: Sinking fund provisions reduce credit risk by scheduled repayments.
Question 198
Which bonds are typically used to finance infrastructure projects?
a) Eurobonds
b) Municipal revenue bonds
c) STRIPS
d) Treasury bills
Answer: b) Municipal revenue bonds
Explanation: Revenue bonds are backed by project revenues, common for infrastructure.
Question 199
Which factor most increases liquidity risk in bonds?
a) Thin trading volume
b) High credit rating
c) Large issuance size
d) Benchmark index inclusion
Answer: a) Thin trading volume
Explanation: Bonds with fewer buyers/sellers are harder to trade without price impact.
Question 200
Which strategy best manages interest rate risk?
a) Duration matching
b) Buy-and-hold
c) Barbell portfolio only
d) Investing in callable bonds
Answer: a) Duration matching
Explanation: Matching duration of assets and liabilities reduces exposure to rate changes.
Congratulations 🎉 You’ve now completed 200 CFA Level 1 Fixed Income practice questions with answers and explanations. This master set is designed to help you tackle one of the most challenging exam topics with confidence.
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