CFA Level 1 - Fixed Income question and answers graded A+ 2023Bond Indenture - correct answer Contract that specifies all the rights and obligations of the issuer and owners of a fixed income security.
Negative Covenants - correct answer Prohibitions on the borrower.
Affirmative Covenants - c...
CFA Level 1 - Fixed Income question and
answers graded A+ 2023
Bond Indenture - correct answer Contract that specifies all the rights and obligations of the issuer and
owners of a fixed income security.
Negative Covenants - correct answer Prohibitions on the borrower.
Affirmative Covenants - correct answer Actions that the borrower promises to perform.
Maturity or Term to Maturity - correct answer Length of time until loan contract or agreement expires.
Remaining life of bond.
Par Value - correct answer Amount borrower promises to pay on or before maturity date.
Coupon Rate - correct answer Rate when multiplied by Par Value gives amount of annual interest
payment.
Zero-Coupon Bonds - correct 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) - correct 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 - correct answer Pay entire principal in one lump sum at maturity.
Serial Bonds - correct answer Pay off principal thru series of pmts over time.
Amortizing Securities - correct answer Make periodic principal and interest pmts (i.e., MBS & ABS).
,Sinking Fund Provisions - correct answer Provide for the retirement of a bond thru a series of predefined
principal pmts over the life of the issue.
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.
options which benefit investor - correct answer Conversion features, put provisions, and floors, non-
callable.
FLOORRECEIVED=bondholder
options which benefit issuer - correct answer Call provisions, prepayment options, sinking fund
provisions, and caps. CAPPAID=issuer
Callable Bond Provisions - correct answer Issuer has right (not obligation) to retire all or part of bond
prior to maturity. There may be several call dates, and customarily when a bond is called on the first
permissible call date, the call price is above par value. The call price will normally decline over time
according to the schedule.
Put Provision - correct 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? - correct 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.
Refunding Provisions - correct 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 - correct answer Prohibit call of an issue using proceeds from a lower coupon
bond issue.
,Coupon Formula (Floater) - correct answer Formula used to find new rate on a floating-rate security
Coupon Rate Cap - correct answer Maximum rate paid by borrower/issuer.
Coupon Rate Floor - correct answer Minimum periodic coupon interest payment received by
lender/security owner.
Coupon Rate Collar - correct answer Simultaneous combination of both cap and floor.
Regular Redemption - correct answer When bonds are redeemed under the call provisions specified in
the bond indenture.
Special Redemption - correct answer When bonds are redeemed to comply with a sinking fund provision
or because of a property sale mandated by government authority.
Repo - correct answer Arrangement where an institution sells a security with a commitment to buy it
back at a later date at a specified higher price.
Repo Rate - correct answer The annualized percentage difference between lender's purchase and sell
back price.
Why are Repo issuances preferred among lenders? - correct answer They are not regulated by the
Federal Reserve and provide better collateral positions for the lenders if the sellers goes bankrupt.
Lenders have only an obligation to sell back the repos rather than stake a claim against sellers' assets.
, Inflation-Indexed Bonds - correct answer Coupon formulas based on inflation; Coupon Formula Ex.: 3% +
annual change in CPI. Par value changes with chgs in CPI
Type of Risks - correct answer 1) Interest rate risk 2) Yield curve risk 3) Call risk
10)Volatility risk 11) Event risk 12) Sovereign risk
Interest Rate Risk - correct 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 - correct answer Long TTM = higher int rate risk (longer time to get
your $$)
Smaller cpns = higher int rate risk (longer time to get your $$)
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) - correct answer When mkt int rates are high, price vol will be lower
When mkt rates are low price vol will be higher
Increase int rate then decrease vol.
Decrease int rate then increase vol.
Interest Rate Risk and Bond Features
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