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37 multiple-choice questions and 26 flashcards on Fixed Income, about 9% of the CFA Level I bank. Every one carries a written rationale.
Fixed Income is one of 10 chapters in CoStudy's CFA Level I bank, and it holds 37 of the bank's 401 multiple-choice questions — roughly 9% of the total. That proportion is not arbitrary: chapters follow the certifying body's published exam outline, and the number of questions in each is set by that domain's published weight, so the share of your practice time this chapter takes matches the share of the real exam it accounts for.
Studying by chapter is worth doing once you have a diagnostic score. A single overall percentage tells you whether you are close; it does not tell you which domain is dragging. Working a weak chapter in isolation, and re-testing it in isolation, is the fastest way to move a score that has stalled — and it is why the mock exams in CoStudy report by domain rather than as one number.
10 questions drawn from this chapter, with the full rationale shown — the controlling principle behind the right answer, and why each wrong option tempts and fails.
A bond's credit spread reflects compensation for:
Answer: D — Default risk, loss given default, and risk premium
A) The risk-free rate is the benchmark subtracted, not the spread. B) Currency risk applies to FX-denominated bonds, distinct from credit spread. C) Inflation is embedded in the benchmark rate, not the spread. D) Correct — credit spread compensates for default probability, LGD, liquidity, and risk premium.
Real estate investment characteristics:
Answer: B — Tangible, income-producing, potential inflation hedge
A) Rental income and depreciation are core features. B) Correct — tangible, income-yielding, hedges inflation. C) Real estate is not a bond substitute. D) Understates real estate's diversification role.
A bond's spot rate for n years is BEST described as the:
Answer: D — Yield on a zero-coupon bond maturing in n years
A) YTM on a coupon bond is a complex average of the underlying spot rates. B) Coupon rates are cash-flow terms, not discount rates. C) Forward rates are the implied rates between two future dates. D) Correct — spot rates are the yields on zero-coupon bonds; together they define the spot curve.
Under normal macroeconomic conditions, the government bond yield curve is typically observed to be:
Answer: B — Upward-sloping, so that longer-dated yields exceed shorter-dated yields (inversion signals recession ahead)
A) That matches inverted, not normal, yield curves. B) Correct — normal shape is upward-sloping, and inversion precedes recessions. C) Flat curves are transitional, not the norm. D) There is a well-documented average upward slope.
A 5-year, 6% annual-coupon bond priced at par has a Macaulay duration closest to:
Answer: D — 4.5 years weighted cash-flow duration
A) Slightly understates by ignoring coupon-timing weight. B) Overstates coupon effect, understating duration. C) Only zero-coupon bonds have duration equal to maturity. D) Correct — a 5-year 6% par coupon bond has Macaulay ≈ 4.47 years.
Beta in the CAPM measures:
Answer: D — The systematic (market) risk sensitivity
A) That describes standard deviation. B) Beta captures systematic, not idiosyncratic risk. C) Credit risk is a separate concept. D) Correct — beta measures market-return sensitivity.
Compared with an otherwise identical option-free bond, a callable bond will typically trade at a:
Answer: C — Lower price and a higher yield, because the embedded call feature benefits the issuer of the bond instead
A) The call harms, not helps, the bondholder. B) Embedded options materially affect valuation. C) Correct — the issuer's option to refinance depresses the price. D) That combines two effects that cannot occur together on the same bond.
Inflation typically affects:
Answer: C — Real returns, bond prices, and hedges
A) Contradicts extensive empirical evidence. B) Ignores equities, real assets, currencies. C) Correct — erodes purchasing power; hedges include TIPS and real assets. D) Understates the breadth of impact.
Reinvestment risk and price risk on a coupon bond MOST often:
Answer: B — Move in opposite directions as rates change
A) They partially offset, not reinforce. B) Correct — falling rates raise prices but lower reinvestment income. C) Both are clearly rate-sensitive exposures. D) That confuses level risk with volatility risk.
A downward-sloping yield curve, under pure expectations theory, implies investors expect:
Answer: A — Future short-term rates to be below current ones
A) Correct — inversion implies lower forward short rates. B) That would produce an upward slope. C) That is a common indirect interpretation, not direct. D) That is a different-theory (liquidity preference) argument.
4 cards from the 26 in this chapter.
What is convexity?
Measures curvature of price-yield relationship. Duration gives linear estimate; convexity corrects for large yield changes. Positive convexity benefits bondholders.
What is the term structure of interest rates?
The relationship between bond yields and maturities. Theories explaining it: expectations, liquidity preference, market segmentation, preferred habitat.
What is risk parity?
A portfolio construction approach allocating risk equally across asset classes rather than equal capital. Typically increases bond allocation and uses leverage.
What is the total return of a bond?
Coupon income + reinvestment income + capital gain/loss. All three components affect actual returns.
These are a sample. The full Fixed Income chapter runs 63 items with per-chapter progress tracking, on the web and in the iOS app.