CFA-L2 FIXED INCOME QUESTION AND ANSWERS 100% CORRECT
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READING 35 – THE TERM STRUCTURE AND INTEREST RATE DYNAMICS
1 Which forward rate cannot be computed from the one-, two-, three-, and four-year
spot rates? The rate for a:
A one-year loan beginning in two years.
A two-year loan beginning in two years.
A three-year loan beginning in two years.
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cfa l2 fixed income question and answersthe term structure and interest rate dynamic
cfa l2 fixed income question and answers
which forward rate cannot be computed from the one
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CFA-L2 FIXED INCOME QUESTION AND ANSWERS/THE TERM STRUCTURE AND INTEREST RATE DYNAMICS
READING 35 – THE TERM STRUCTURE AND INTEREST RATE DYNAMICS
1 Which forward rate cannot be computed from the one-, two-, three-, and four-year
spot rates? The rate for a:
A one-year loan beginning in two years.
A two-year loan beginning in two years.
A three-year loan beginning in two years.
1 Consider spot rates for three zero-coupon bonds: r(1) = 3%, r(2) = 4%, and r(3) = 5%.
Which statement is correct? The forward rate for a one-year loan beginning in one
year will be:
A less than the forward rate for a one-year loan beginning in two-years.
A greater than the forward rate for a two-year loan beginning in one-year.
A greater than the forward rate for a one-year loan beginning in two-years.
1 If one-period forward rates are decreasing with maturity, the yield curve is most likely:
A flat.
A upward-sloping.
A downward sloping.
The following information relates to Questions 16–29
A one-year zero-coupon bond yields 4.0%. The two- and three-year zero-coupon bonds yield
5.0% and 6.0% respectively.
1 The rate for a one-year loan beginning in one year is closest to:
A 4.5%.
A 5.0%.
A 6.0%.
1 The forward rate for a two-year loan beginning in one year is closest to:
A 5.0%
A 6.0%
, A 7.0%
1 The forward rate for a one-year loan beginning in two years is closest to:
A 6.0%
A 7.0%
A 8.0%
1 The five-year spot rate is not given above; however, the forward price for a two-year
zero-coupon bond beginning in three years is known to be 0.8479. The price today of
a five-year zero-coupon bond is closest to:
A 0.7119.
A 0.7835.
A 0.9524.
1 The one-year spot rate r(1) = 4%, the forward rate for a one-year loan beginning in
one year is 6%, and the forward rate for a one-year loan beginning in two years is 8%.
Which of the following rates is closest to the three-year spot rate?
A 4.0%
A 6.0%
A 8.0%
1 The one-year spot rate r(1) = 5% and the forward price for a one-year zero-coupon
bond beginning in one year is 0.9346. The spot price of a two-year zero-coupon bond
is closest to:
A 0.87.
A 0.89.
A 0.93.
1 In a typical interest rate swap contract, the swap rate is best described as the interest
rate for the:
A fixed-rate leg of the swap.
A floating-rate leg of the swap.
A difference between the fixed and floating legs of the swap.
,1 A two-year fixed-for-floating Libor swap is 1.00% and the two-year US Treasury
bond is yielding 0.63%. The swap spread is closest to:
A 37 bps.
A 100 bps.
A 163 bps.
1 The swap spread is quoted as 50 bps. If the five-year US Treasury bond is yielding
2%, the rate paid by the fixed payer in a five-year interest rate swap is closest to:
A 0.50%.
A 1.50%.
A 2.50%.
1 If the three-month T-bill rate drops and the Libor rate remains the same, the relevant
TED spread:
A increases.
A decreases.
A does not change.
1 Given the yield curve for US Treasury zero-coupon bonds, which spread
is most helpful pricing a corporate bond? The:
A Z-Spread.
A TED spread.
A Libor–OIS spread.
1 A four-year corporate bond with a 7% coupon has a Z-spread of 200 bps. Assume a
flat yield curve with an interest rate for all maturities of 5% and annual compounding.
The bond will most likely sell:
A close to par.
A at a premium to par.
A at a discount to par.
1 The Z-spread of Bond A is 1.05% and the Z-spread of Bond B is 1.53%. All else
equal, which statement best describes the relationship between the two bonds?
A Bond B is safer and will sell at a lower price.
, A Bond B is riskier and will sell at a lower price.
A Bond A is riskier and will sell at a higher price.
1 Which term structure model can be calibrated to closely fit an observed yield curve?
A The Ho–Lee Model
A The Vasicek Model
A The Cox–Ingersoll–Ross Model
The following information relates to Questions 30–36
Jane Nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an
investment bank. Nguyen is responsible for her own trading activities and also for providing
assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit
1 presents the current par and spot rates.
Exhibit 1. Current Par and Spot Rates
Maturity Par Rate Spot Rate
One year 2.50% 2.50%
Two years 2.99% 3.00%
Three years 3.48% 3.50%
Four years 3.95% 4.00%
Five years 4.37%
Note: Par and spot rates are based on annual-coupon sovereign bonds.
Nguyen gives Alexander two assignments that involve researching various questions:
1. Assignment 1
What is the yield to maturity of the option-free, default risk–free bond presented in
Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in
Exhibit 1.
Exhibit 2. Selected Data for $1,000 Par Bond
Bond
Name Maturity (T) Coupon
Bond Z Three years 6.00%
Note: Terms are today for a T-year loan.
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