CFA Level I Fixed Income practice questions

25 exam-style questions from across Fixed Income, which is 11–14% of the Level I exam (roughly 20–25 of the 180 questions). Pick an answer to see whether you were right, why each option is right or wrong, and the lesson to go back to.

Allow about 90 seconds a question, the exam pace. Every question is original and written for the CFA Level I curriculum.

Module 1 Fixed-Income Instrument Features

1A CHF 200,000 par bond carries a 3.6% coupon paid quarterly. Each coupon payment is closest to:
Show the answer

The answer is A.

A. 200,000 × 3.6% = 7,200 a year, divided by 4 payments = 1,800.
B. Divides the annual coupon by 2, as if the bond paid semiannually. The trap
C. The full annual coupon, not divided by the payment frequency.
On your calculator
1. 200000×0.036÷4= 1800
1. 200000ENTER0.036×4÷ 1800
ENTER enter (on the HP, puts the number on the stack)
From the lesson The features of a bond
2An indenture states that a default on any of the issuer's other borrowings will also count as a default on this bond. This is best described as:

Show the answer

The answer is A.

A. A cross-default clause is an affirmative covenant.
B. 'Default' sounds restrictive, but the clause does not stop the issuer doing anything. The trap
C. A negative pledge stops the issuer pledging assets to other lenders or issuing debt that ranks ahead of this bond. It is a negative covenant, and this clause restricts nothing.

From the lesson Bond indentures and covenants

Module 2 Fixed-Income Cash Flows and Types

3A CHF 2,000,000 loan at 4% a year is repaid with four equal annual payments. Each payment is closest to:
Show the answer

The answer is B.

A. Ignores interest: 2,000,000 ÷ 4.
B. 0.04 × 2,000,000 ÷ (1 − 1.04⁻⁴) = 80,000 ÷ 0.145196 ≈ 550,980.
C. Equal principal of 500,000 plus the first year's interest of 80,000. That is the first payment of an equal-principal schedule, not a level payment. The trap
On your calculator
1. 2NDCLR TVM with P/Y set to 1
2. 4N4I/Y2000000+|-PV
3. CPTPMT 550,980.09
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · +|- change sign · PV present value · CPT compute · PMT payment
1. fCLEAR FIN
2. 4n4i2000000CHSPV
3. PMT 550,980.09
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · CHS change sign · PV present value · PMT payment
From the lesson Bullet, amortizing and sinking fund bonds
4A EUR 1,000 par convertible bond has a conversion price of EUR 40. The issuer's shares trade at EUR 35.20. The conversion value of one bond is closest to:
Show the answer

The answer is A.

A. Conversion ratio 1,000 ÷ 40 = 25 shares; 25 × 35.20 = 880.
B. That is par, not the value of the shares received.
C. Divides par by the share price and multiplies by the conversion price: 1,000 ÷ 35.20 × 40 = 1,136.36. The trap
On your calculator
1. 1000÷40×35.2= 880
1. 1000ENTER40÷35.2× 880
ENTER enter (on the HP, puts the number on the stack)
From the lesson Callable, putable and convertible bonds

Module 3 Fixed-Income Issuance and Trading

5A pension plan may hold only investment-grade bonds. Of the following, it may buy the bond rated:

Show the answer

The answer is C.

A. BB+ is the highest speculative grade on the S&P and Fitch scale, one notch below the line.
B. Ba1 is Moody's version of BB+: the first high-yield rung. One a, not two. The trap
C. Baa3 is Moody's lowest investment-grade rating, the equivalent of BBB−.

From the lesson Bond market segments, issuers and investors
6Compared with a broad equity index, a broad bond index most likely has:

Show the answer

The answer is B.

A. Bond indexes hold many more securities, because one issuer can have many bonds.
B. Many bonds per issuer give more constituents, and maturities plus new issues give more turnover.
C. Turnover is higher, not lower, because bonds mature and new ones are issued all the time. The trap

From the lesson Bond indexes and how they differ from equity indexes

Module 4 Fixed-Income Markets for Corporate Issuers

7A company wants a bank to commit funding that cannot be withdrawn for the next three years, and it accepts covenants like those in a bond indenture in return. It is most likely arranging a(n):

Show the answer

The answer is C.

A. The bank promises nothing and can refuse any drawing, so this is the least reliable form.
B. A written commitment, but usually for only 364 days, so it must be renewed each year. The trap
C. A revolver is a multiyear commitment, and lenders ask for covenants in return. It is the most reliable bank funding.

From the lesson Short-term funding for companies: credit lines, secured loans and commercial paper
8A cash lender accepts a corporate bond as repo collateral but applies a 4.00% haircut. The initial margin is closest to:
Show the answer

The answer is C.

A. Inverts the ratio: loan ÷ collateral = 1 − 0.04. Initial margin is collateral ÷ loan, so it is above 100%.
B. Adds the haircut to 100%. That treats the haircut as a share of the loan, but it is a share of the collateral. The trap
C. Loan = S × (1 − 0.04) = 0.96 S, so initial margin = S ÷ 0.96 S = 1 ÷ 0.96 = 104.17%.
On your calculator
1. 1−0.04=1/x 1.0417
1/x reciprocal
1. 1ENTER0.04−1/x 1.0417
ENTER enter (on the HP, puts the number on the stack) · 1/x reciprocal
From the lesson Repurchase agreements (repos)

Module 5 Fixed-Income Markets for Government Issuers

9A Chicago-based bond fund buys US-dollar bonds issued by the government of a copper-exporting emerging economy. The fund's remaining currency-related risk on these bonds most likely comes from the fact that:

Show the answer

The answer is B.

A. The coupons are paid in US dollars, so there is no conversion for the investor to bear. The trap
B. The investor has no direct exposure, but the issuer must earn dollars through exports and capital inflows. If those fall, the issuer may be unable to pay.
C. Nothing in a plain dollar bond ties the principal to the local currency.

From the lesson Sovereign debt: who borrows, in what currency, for how long
10A sovereign offers USD 3.0 billion. Non-competitive bids total USD 0.4 billion. Competitive bids are 2.10% for 0.9 billion, 2.14% for 1.1 billion, 2.18% for 0.8 billion and 2.22% for 0.7 billion. The cut-off yield is closest to:
Show the answer

The answer is B.

A. Bids up to 2.14% total only 2.0 billion, short of the 2.6 billion needed.
B. 3.0 − 0.4 = 2.6 billion for competitive bids. Cumulative 0.9, 2.0, 2.8: the offering is filled at 2.18%.
C. This is the answer if non-competitive bids are ignored: 3.0 billion would need the next bid. They are filled first and reduce what remains. The trap
On your calculator
1. 3−0.4= 2.6 bn needed
2. 0.9+1.1= 2.0, still short
3. +0.8= 2.8, passes 2.6 at the 2.18% bid
1. 3ENTER0.4− 2.6 bn needed
2. 0.9ENTER1.1+ 2.0, still short
3. 0.8+ 2.8, passes 2.6 at the 2.18% bid
ENTER enter (on the HP, puts the number on the stack)
From the lesson Government bond auctions and trading vs corporate bonds

Module 6 Bond Valuation: Prices and Yields

11A 5-year bond pays a 4.5% annual coupon. Its yield to maturity is 5.2%. Its price per 100 of par is closest to:
Show the answer

The answer is A.

A. N = 5, I/Y = 5.2, PMT = 4.5, FV = 100 gives 96.986. The coupon is below the yield, so a discount.
B. Assumes the bond trades at par, which needs the yield to equal the coupon.
C. Swaps coupon and yield (a 5.2% coupon at a 4.5% yield), which gives a premium. The trap
On your calculator
1. 2NDCLR TVM with P/Y set to 1
2. 5N5.2I/Y4.5PMT100FV
3. CPTPV −96.986
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · FV future value · CPT compute · PV present value
1. fCLEAR FIN
2. 5n5.2i4.5PMT100FV
3. PV −96.986
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · FV future value · PV present value
From the lesson Pricing a bond from its yield to maturity
12A bond pays a 6% annual coupon (actual/actual). Its last coupon was paid on 10 February 2026 and the next is due on 10 February 2027. Four annual coupons remain from 10 February 2026. For settlement on 15 July 2026 at a 5% yield to maturity, the full price per 100 of par is closest to:
Show the answer

The answer is C.

A. This is the flat price: 105.714 − 2.548 accrued interest.
B. The value on the last coupon date (N = 4, I/Y = 5, PMT = 6, FV = 100). It has not been rolled forward. The trap
C. 103.546 × 1.05^(155/365) = 105.714, with 155 days since the last coupon and 365 in the period.
On your calculator
1. 2NDCLR TVM with P/Y set to 1
2. 4N5I/Y6PMT100FV
3. CPTPV −103.546
4. +|-STO1 make it positive and store it
5. 1.05y^x(155÷365)×RCL1= 105.714
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · FV future value · CPT compute · PV present value · +|- change sign · STO store · y^x power · RCL recall a stored number
1. fCLEAR FIN
2. 4n5i6PMT100FV
3. PV −103.546
4. CHS 103.546
5. 1.05ENTER155ENTER365÷y^x× 105.714
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · FV future value · PV present value · CHS change sign · ENTER enter (on the HP, puts the number on the stack) · y^x power
From the lesson Accrued interest, flat price and full price

Module 7 Yield and Yield Spread Measures for Fixed-Rate Bonds

13A bond yields 4.80% on a semiannual bond basis. Its effective annual rate is closest to:
Show the answer

The answer is B.

A. Reports the stated yield without converting it to periodicity 1. The trap
B. (1 + 0.048 ÷ 2)² − 1 = 1.024² − 1 = 4.858%.
C. Uses continuous compounding: e^0.048 − 1 = 4.917%. The bond compounds twice a year, not continuously.
On your calculator
1. 1.024y^x2=−1= 0.048576
y^x power
1. 1.024ENTER2y^x1− 0.048576
ENTER enter (on the HP, puts the number on the stack) · y^x power
From the lesson Periodicity: converting yields between compounding frequencies

Module 8 Yield and Yield Spread Measures for Floating-Rate Instruments

14On a reset date, an FRN's issuer has been downgraded, so investors now require a margin above the note's quoted margin. The FRN most likely trades:

Show the answer

The answer is A.

A. The required margin exceeds the quoted margin, so the coupon is deficient and the note sells at a discount equal to the present value of that shortfall.
B. Par needs the required margin to equal the quoted margin. A downgrade breaks that. The trap
C. A premium needs the required margin to fall below the quoted margin, which is what an upgrade does.

From the lesson Floating-rate notes: quoted margin and discount margin

Module 9 Term Structure: Spot, Par and Forward Curves

15Spot rates are 2.8% (1 year), 3.3% (2 years) and 3.9% (3 years). The price of a 3-year, 4% annual-coupon bond per 100 of par is closest to:
Show the answer

The answer is B.

A. Discounts every cash flow at the 3-year spot rate of 3.9%. The trap
B. 4 ÷ 1.028 + 4 ÷ 1.033² + 104 ÷ 1.039³ = 3.891 + 3.748 + 92.723 = 100.362.
C. Discounts every cash flow at the average spot rate of 3.333%.
On your calculator
1. 4÷1.028=STO1
2. 4÷(1.033y^x2)=STO2
3. 104÷(1.039y^x3)+RCL1+RCL2= 100.3624
STO store · y^x power · RCL recall a stored number
1. 4ENTER1.028÷
2. 4ENTER1.033ENTER2y^x÷+
3. 104ENTER1.039ENTER3y^x÷+ 100.3624
ENTER enter (on the HP, puts the number on the stack) · y^x power
From the lesson Spot rates and pricing a bond with the spot curve

Module 10 Interest Rate Risk and Return

16An investor buys a 5-year, 6% annual-coupon bond at par. Rates immediately rise to 7% and stay there. The investor sells after 2 years. The annualized horizon yield is closest to:
Show the answer

The answer is A.

A. Coupons: 6 × 1.07 + 6 = 12.42. Sale price with 3 years left at 7%: 97.376. (12.42 + 97.376) ÷ 100 = 1.09796, square root less 1 = 4.78%.
B. The coupon rate, which is the return only if rates never moved.
C. Ignores the price loss and sells at 100: ((12.42 + 100) ÷ 100)^(1/2) − 1 = 6.03%. The trap
On your calculator
1. 2NDCLR TVM with P/Y set to 1
2. 2N7I/Y6PMT
3. CPTFV −12.42
4. 2NDCLR TVM
5. 3N7I/Y6PMT100FV
6. CPTPV −97.376
7. 2NDCLR TVM
8. 2N100+|-PV12.42+97.376=FV
9. CPTI/Y 4.784
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · CPT compute · FV future value · PV present value · +|- change sign
1. fCLEAR FIN
2. 2n7i6PMT
3. FV −12.42
4. fCLEAR FIN
5. 3n7i6PMT100FV
6. PV −97.376
7. fCLEAR FIN
8. 2n100CHSPV12.42ENTER97.376+FV
9. i 4.784
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · FV future value · PV present value · CHS change sign · ENTER enter (on the HP, puts the number on the stack)
From the lesson The sources of return from a fixed-rate bond

Module 11 Modified Duration, Money Duration and PVBP

17A semiannual-pay bond yields 4.00% and has an annualized Macaulay duration of 6.80. If its yield rises by 75 bp, the estimated percentage decrease in its full price is closest to:
Show the answer

The answer is B.

A. Divides by the annual factor 1.04 instead of the semiannual factor 1.02: 6.538 × 0.0075 = 4.90%.
B. ModDur = 6.80 ÷ 1.02 = 6.667; 6.667 × 0.0075 = 5.00%.
C. Uses Macaulay duration directly: 6.80 × 0.0075 = 5.10%. The trap
On your calculator
1. 6.8÷1.02= 6.6667
2. ×0.0075= 0.05, so a 5.00% fall
1. 6.8ENTER1.02÷ 6.6667
2. 0.0075× 0.05, so a 5.00% fall
ENTER enter (on the HP, puts the number on the stack)
From the lesson Modified duration

Module 12 Convexity and Portfolio Duration

18A bond's full price is 98.40. At a yield 15 bp lower its price is 99.60, and at a yield 15 bp higher it is 97.22. Its approximate convexity is closest to:
Show the answer

The answer is C.

A. Puts a 2 in the denominator, copying the duration formula. The trap
B. Divides by 100 instead of by the full price 98.40.
C. (99.60 + 97.22 − 2 × 98.40) ÷ (0.0015² × 98.40) = 0.02 ÷ 0.0002214 = 90.33.
On your calculator
1. 99.6+97.22−196.8=÷0.0015÷0.0015÷98.4= 90.33
1. 99.6ENTER97.22+196.8−0.0015÷0.0015÷98.4÷ 90.33
ENTER enter (on the HP, puts the number on the stack)
From the lesson Convexity and the convexity adjustment

Module 13 Effective Duration, Key Rate Duration and Empirical Duration

19For a callable corporate bond, an analyst should most appropriately measure interest rate risk with:

Show the answer

The answer is C.

A. Assumes fixed, known cash flows and a single yield-to-maturity.
B. Also built on the yield-to-maturity and promised cash flows. The call makes the cash flows depend on rates. The trap
C. Effective duration shifts the benchmark curve and reprices with an option model, so it lets the cash flows change.

From the lesson Effective duration and effective convexity

Module 14 Credit Risk

20A loan has an expected exposure of GBP 2,500,000, a recovery rate of 35% and a one-year probability of default of 4%. Its one-year expected loss is closest to:
Show the answer

The answer is B.

A. Uses the recovery rate instead of one minus the recovery rate: 0.04 × 2,500,000 × 0.35. The trap
B. 0.04 × 2,500,000 × (1 − 0.35) = 0.04 × 1,625,000 = 65,000.
C. Ignores recovery: 0.04 × 2,500,000.
On your calculator
1. 1−0.35=×2500000×0.04= 65,000
1. 1ENTER0.35−2500000×0.04× 65,000
ENTER enter (on the HP, puts the number on the stack)
From the lesson Credit risk: probability of default and loss given default

Module 15 Credit Analysis for Government Issuers

21The principle of sovereign immunity most likely makes which aspect of a sovereign's credit analysis especially important?

Show the answer

The answer is B.

A. Ability to pay matters, but immunity is about enforcement, not capacity. The trap
B. Investors cannot force a sovereign into bankruptcy or liquidation, so repayment depends on whether the government chooses to pay.
C. Sovereign bonds are rarely backed by collateral that bondholders can seize.

From the lesson Sovereign credit analysis: qualitative factors

Module 16 Credit Analysis for Corporate Issuers

22A company has debt of EUR 900 million, cash of EUR 120 million, EBIT of EUR 150 million and depreciation and amortization of EUR 50 million. Its debt-to-EBITDA ratio is closest to:
Show the answer

The answer is B.

A. Uses net debt: (900 − 120) ÷ 200. This ratio uses gross debt.
B. EBITDA = 150 + 50 = 200. Debt to EBITDA = 900 ÷ 200 = 4.5×.
C. Uses EBIT instead of EBITDA: 900 ÷ 150. The trap
On your calculator
1. 900÷(150+50)= 4.5
1. 900ENTER150ENTER50+÷ 4.5
ENTER enter (on the HP, puts the number on the stack)
From the lesson Financial ratios in credit analysis

Module 17 Securitization: How It Works and Why

23Being able to choose a tranche whose risk, return and maturity match its liabilities is most likely a benefit of securitization to:

Show the answer

The answer is B.

A. Issuers gain capital relief, fees, more lending and cheaper funding. They do not choose a tranche to match liabilities. The trap
B. Tailoring interest rate and credit risk exposure to a risk, return and maturity need is the investor benefit.
C. Servicers collect payments for a fee. Tailored exposure is not their benefit.

From the lesson Why securitize? Benefits for issuers, investors and markets

Module 18 Asset-Backed Securities, Covered Bonds and CDOs

24A securitization has a senior tranche of EUR 350 million, a mezzanine tranche of EUR 90 million and a junior tranche of EUR 60 million. If the pool suffers losses of EUR 110 million, the loss borne by the mezzanine tranche is closest to:
Show the answer

The answer is B.

A. Shares the loss pro rata: 110 × 90 ÷ 500. Losses are not shared pro rata. The trap
B. The junior tranche absorbs the first 60. The remaining 110 − 60 = 50 falls on the mezzanine, which keeps 40.
C. Assumes the mezzanine is wiped out. Only 50 of loss reaches it.
On your calculator
1. 110−60= 50
1. 110ENTER60− 50
ENTER enter (on the HP, puts the number on the stack)
From the lesson Credit enhancement and credit tranching

Module 19 Mortgage-Backed Securities: RMBS, CMOs and CMBS

25Mortgage rates fall sharply and homeowners refinance. MBS investors most likely face:

Show the answer

The answer is A.

A. Falling rates speed up prepayments. Principal comes back early and must be reinvested at lower rates.
B. Extension risk appears when rates rise and prepayments slow. The trap
C. A refinancing repays the old loan in full, so the investor loses nothing to default. The problem is timing, not credit.

From the lesson Prepayment risk and time tranching

Keep going

Study the topic module by module in the Fixed Income lessons, look up a word in the Level I glossary, or run a timed practice set that tracks your score by topic.