31 CFA Level 2 Practice Exams Free Questions and Answers on Fixed Income

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Bond ratings indicate probability of default1. Downgrade risk (AAA highest) 2. Default risk 3. Credit spread risk

• Forms of Credit Risk
• Yield curve risk
• Credit Spread risk
• Sovereign Risk

Determined by bid-ask spread

• Inflation Risk
• Event Risk
• Liquidity Risk
• Sovereign Risk

Coupon is reset on a periodic basis (reference rate + fixed margin)

• Floating rate securities
• Exchange rate risk
• Callable and prepayable securities
• Graph of duration

Approximation of price sensitivity of portfolio bonds to a parallel shift in the yield curve

• Dollar duration
• Graph of duration
• Portfolio duration
• Price using duration

Approximate price change due to 1% change in yield

• Duration
• YTM
• Dollar duration
• IRR

Increased volatility = increase value of options

• Dollar duration
• Portfolio duration
• Graph of duration
• Volatility and options

Up = decrease in liquidity- lower sale price, decreased returnsDown = increase in liquidity

• IRR
• Event Risk
• Credit Spread risk
• Bid-Ask Spread

Yield to Maturity = IRR = coupon reinvestment income + coupons + par

• Event Risk
• YTM
• IRR
• Duration

Likely to be called when interest rates low (also repayments more likely)

• Credit Spread risk
• Callable and prepayable securities
• Callable bond formula
• Floating rate securities

Duration X (.01) x Price = Dollar duration

• Duration
• Dollar duration
• Graph of duration
• Portfolio duration

If Foreign currency depreciates, reduces returns

• Credit Spread risk
• Yield curve risk
• Exchange rate risk
• Event Risk