CFA Level 1 - Fixed
2024 Income Test || With
100% Accurate
Solutions
Conceptial Researchers ||
,CFA Level 1 - Fixed Income Test || With
100% Accurate Solutions
Type of Risks - ANSWER - 1) Interest rate risk 2) Yield curve risk 3) Call risk
4) Prepayment risk 5) Reinvestment risk 6) Credit risk
7) Liquidity risk 8) Exchange-rate risk 9) Inflation risk
10)Volatility risk 11)
Event risk 12) Sovereign risk
Interest Rate Risk - ANSWER - The effect of changes in the prevailing market rate of
interest on bond values. Inverse relationship btwn interest rates and bd prices. i.e.,
When rate goes up, bond prices fall.
Interest Rate Risk and Bond Features - ANSWER - LT to Mat bds exhibit higher int
rate risk (all else the same).
Bds w/ smaller cpns exhibit higher int rate risk (all else the same).
Low cpn then high price vol.
High cpn then low price vol.
LT to Mat then high price vol.
ST to Mat then low price vol.
Interest Rate Risk and Bond Features
(Market Interest Rates) - ANSWER - When mkt int rates are high, price vol will be
lower than when mkt int rates are low.
Increase int rate then decrease vol.
Decrease int rate then increase vol.
Interest Rate Risk and Bond Features
(Deep Discount Bonds 1) - ANSWER - Deep Disc Bd w/ low cpn relative to mkt then
bd has increased price vol.
Deep Disc Bd w/ high cpn relative to mkt then bd has decreased price vol.
Interest Rate Risk and Bond Features
(Deep Discount Bonds 2) - ANSWER - Compared w/ Bds selling at par, deep disc
bds have greater price vol.
Investors expecting declining int rates prefer zeros w/ long term to mat.
Decreasing Int Rates then Reinvestment Rate Decreases and will not earn initial
YTM
Int Rate Decrease then Bd Price Increases with Increased Cap Gain.
Investors expecting increasing int rates will not prefer zeros w/ long term to mat.
Put Provision - ANSWER - Grants right to sell (put) the bond to the issuer at a
specified price prior to maturity.
When would it be beneficial for a bondholder to exercise a put option? - ANSWER -
If interest rates have risen and/or the creditworthiness of the issuer has deteriorated
so that the market price of the bond has fallen below par.
, Non-Callable Bond - ANSWER - Absolute protection against call prior to maturity.
Refunding Provisions - ANSWER - Nonrefundable bonds prohibit premature
retirement of issue using proceeds of a lower cpn bd. Bds that carry these provisions
can be freely callable, but not refundable.
Non-Refundable Bond - ANSWER - Prohibit call of an issue using proceeds from a
lower coupon bond issue.
Bond Indenture - ANSWER - Contract that specifies all the rights and obligations of
the issuer and owners of a fixed income security.
Negative Covenants - ANSWER - Prohibitions on the borrower.
Affirmative Covenants - ANSWER - Actions that the borrower promises to perform.
Maturity or Term to Maturity - ANSWER - Length of time until loan contract or
agreement expires. Remaining life of bond.
Par Value - ANSWER - Amount borrower promises to pay on or before maturity date.
Coupon Rate - ANSWER - Rate when multiplied by Par Value gives amount of
annual interest payment.
Zero-Coupon Bonds - ANSWER - Bonds that do not pay interest; Instead sold at a
deep discount from par values. Market convention states semi-annual compounding
used when pricing zeros.
Non-Amortizing Bond (Bullet Bond or Bullet Maturity) - ANSWER - Characteristic of
most T-Bonds and Corporate bonds. Pay only interest until maturity, at which time
full face value is paid back.
Bullet Bonds - ANSWER - Pay entire principal in one lump sum at maturity.
Serial Bonds - ANSWER - Pay off principal thru series of pmts over time.
Amortizing Securities - ANSWER - Make periodic principal and interest pmts (i.e.,
MBS & ABS).
Sinking Fund Provisions - ANSWER - Provide for the retirement of a bond thru a
series of predefined principal pmts over the life of the issue.
Sinking-Fund Provisions - ANSWER - Cash Payment - issuer deposits cash with
trustee who retires applicable proportion of bonds at par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in the
market and delivers them to trustee who will retire them.
Investor options - ANSWER - Conversion features, put provisions, and floors.
2024 Income Test || With
100% Accurate
Solutions
Conceptial Researchers ||
,CFA Level 1 - Fixed Income Test || With
100% Accurate Solutions
Type of Risks - ANSWER - 1) Interest rate risk 2) Yield curve risk 3) Call risk
4) Prepayment risk 5) Reinvestment risk 6) Credit risk
7) Liquidity risk 8) Exchange-rate risk 9) Inflation risk
10)Volatility risk 11)
Event risk 12) Sovereign risk
Interest Rate Risk - ANSWER - The effect of changes in the prevailing market rate of
interest on bond values. Inverse relationship btwn interest rates and bd prices. i.e.,
When rate goes up, bond prices fall.
Interest Rate Risk and Bond Features - ANSWER - LT to Mat bds exhibit higher int
rate risk (all else the same).
Bds w/ smaller cpns exhibit higher int rate risk (all else the same).
Low cpn then high price vol.
High cpn then low price vol.
LT to Mat then high price vol.
ST to Mat then low price vol.
Interest Rate Risk and Bond Features
(Market Interest Rates) - ANSWER - When mkt int rates are high, price vol will be
lower than when mkt int rates are low.
Increase int rate then decrease vol.
Decrease int rate then increase vol.
Interest Rate Risk and Bond Features
(Deep Discount Bonds 1) - ANSWER - Deep Disc Bd w/ low cpn relative to mkt then
bd has increased price vol.
Deep Disc Bd w/ high cpn relative to mkt then bd has decreased price vol.
Interest Rate Risk and Bond Features
(Deep Discount Bonds 2) - ANSWER - Compared w/ Bds selling at par, deep disc
bds have greater price vol.
Investors expecting declining int rates prefer zeros w/ long term to mat.
Decreasing Int Rates then Reinvestment Rate Decreases and will not earn initial
YTM
Int Rate Decrease then Bd Price Increases with Increased Cap Gain.
Investors expecting increasing int rates will not prefer zeros w/ long term to mat.
Put Provision - ANSWER - Grants right to sell (put) the bond to the issuer at a
specified price prior to maturity.
When would it be beneficial for a bondholder to exercise a put option? - ANSWER -
If interest rates have risen and/or the creditworthiness of the issuer has deteriorated
so that the market price of the bond has fallen below par.
, Non-Callable Bond - ANSWER - Absolute protection against call prior to maturity.
Refunding Provisions - ANSWER - Nonrefundable bonds prohibit premature
retirement of issue using proceeds of a lower cpn bd. Bds that carry these provisions
can be freely callable, but not refundable.
Non-Refundable Bond - ANSWER - Prohibit call of an issue using proceeds from a
lower coupon bond issue.
Bond Indenture - ANSWER - Contract that specifies all the rights and obligations of
the issuer and owners of a fixed income security.
Negative Covenants - ANSWER - Prohibitions on the borrower.
Affirmative Covenants - ANSWER - Actions that the borrower promises to perform.
Maturity or Term to Maturity - ANSWER - Length of time until loan contract or
agreement expires. Remaining life of bond.
Par Value - ANSWER - Amount borrower promises to pay on or before maturity date.
Coupon Rate - ANSWER - Rate when multiplied by Par Value gives amount of
annual interest payment.
Zero-Coupon Bonds - ANSWER - Bonds that do not pay interest; Instead sold at a
deep discount from par values. Market convention states semi-annual compounding
used when pricing zeros.
Non-Amortizing Bond (Bullet Bond or Bullet Maturity) - ANSWER - Characteristic of
most T-Bonds and Corporate bonds. Pay only interest until maturity, at which time
full face value is paid back.
Bullet Bonds - ANSWER - Pay entire principal in one lump sum at maturity.
Serial Bonds - ANSWER - Pay off principal thru series of pmts over time.
Amortizing Securities - ANSWER - Make periodic principal and interest pmts (i.e.,
MBS & ABS).
Sinking Fund Provisions - ANSWER - Provide for the retirement of a bond thru a
series of predefined principal pmts over the life of the issue.
Sinking-Fund Provisions - ANSWER - Cash Payment - issuer deposits cash with
trustee who retires applicable proportion of bonds at par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in the
market and delivers them to trustee who will retire them.
Investor options - ANSWER - Conversion features, put provisions, and floors.
