105 Effective Free CFA Practice Exams Level 1 Questions and Answers on Fixed Income

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1) bond with prepayment options2)floating-rate debt (coupon is dependent on future rates)3)Bond is convertible/exchangeable (dependent on pricing of other variable)

• treasury bond/note pricing in 2ndary market
• Duration Points for traditional bonds
• How do you calculate implied forward rates?
• Types of bonds for which difficult to estimate expected cash flows

Same as market segmentation (supply and demand) theory, but investors can be influenced to move from preferred maturity range when yields are sufficiently higher in other maturity ranges.

• Preferred Habitat Yield Curve Theory
• Market Segmentation Yield Curve Theory
• CDOs - what are they
• CMOs - what are they

quoted in % and 32nds of 1% of face value form. i.e. quote of 102-5 means = 102% plus 5/32% of par, which for $100,000 par t-bond is 1.0215625 x 100,000

• Secondary Bond Market - characteristics
• Medium Term Notes - what are they
• Yield Spot Rates - what are they
• treasury bond/note pricing in 2ndary market

Refers to the spread between yields for 2 like securities with different ratings, therefore showing the risk-return needed for different ratings. Moves relative to economic health

• Credit Spreads - What are they
• Yield Spot Rates - what are they
• CMOs - what are they
• CDOs - what are they

Yield on a callable bond trading at a premium. Same calculation at standard TVM in calculator, except substitute PAR VALUE (FV) with the call price and N periods with the # of periods until call date(semiannual)-Yield to First Par Call is same as above except until first call date at par value

• What is a forward rate?
• What is Yield to Call?
• What is a price-yield profile
• Liquidity Risk

-2 identical bonds w/ one with longer maturity = greater duration because it will have greater % change in value for a given change in yield-2 identical bonds w/ one with higher coupon = lower duration and price changes less for given change in yield

• security owner options: types
• Duration Calculation
• Duration Points for traditional bonds
• Margin buying definition

1)discount rate - rate at which banks can borrow from fed. Affects all other lending rates.2)open market ops - buying/selling tres (most common)3)bank reserve requirements - limits effecting lending amounts4)persuading banks on their credit policies - loosen/tighten lending

• Exchange-Rate Risk
• Floating Rate Types
• Feds 4 interest rate tools:
• Structured MTN types

1) high coupons because there's more cash flow to reinvest2) long maturities because more of the total value of the investment is in the coupon cash flows (and interest on those cash flows)

• What are the major increasers of reinvestment risk?
• What is a funded investor?
• what does Yield to Refunding mean?
• What does BEY mean? And what is the Annual-Pay YTM?

step ups - coupon increasesinverse floaters- coupon rate inverse to reference rate movementsdeleveraged floaters - coupon rate = fraction of reference rate plus constant margindual-indexed floaters - coupon rate based on difference between 2 reference ratesrange notes - coupon rate = reference rate if it is within a range, 0 if outside the rangeindex amortizing notes - coupon rate is fixed but some principal is repaid before maturity, with the amount of principal prepaid based on the level of ref rate.

• 3 Yield Spread types
• structured notes
• Structured MTN types
• Embedded options

approx. % change in security price for a 1% yield change.Duration = % change in bond price / % change in yieldzero-coupon bond duration approx = years to maturityfloater duration approx = fraction of a year until next coupon reset dateConversely, % change bond price = - duration x change in yield

• Volatility Risk
• Reason for CMOs
• Duration Calculation
• Call Provision