CFA Level I Fixed Income Practice Questions
Fixed Income makes up 6 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 24 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.
1. A 3-year bond pays a 6% annual coupon. If its yield to maturity is 5%, its price per 100 of par is closest to:
- A.103.00
- B.102.72
- C.100.00
- D.97.33
Answer: B. Price = 6/1.05 + 6/1.05^2 + 106/1.05^3 = 102.72. The coupon exceeds the yield, so the bond trades at a premium; 103.00 just adds a point a year.
2. A fixed-rate bond trades at a premium to par. If its yield to maturity stays the same, as the bond approaches maturity its price will:
- A.Stay at today's price
- B.Fall below par, then recover
- C.Rise further above par
- D.Fall toward par
Answer: D. With an unchanged yield, a premium bond's price moves along the constant-yield path toward par (the pull to par), reaching par at maturity. A discount bond's price rises toward par in the same way.
3. A 5-year zero-coupon bond has an annual yield of 4%. Its price per 100 of par is closest to:
- A.82.19
- B.78.35
- C.80.00
- D.96.15
Answer: A. Price = 100 / 1.04^5 = 82.19. 80.00 subtracts simple interest, and 78.35 discounts at 5%.
4. A bond with annual coupons has a Macaulay duration of 7.2 and a yield to maturity of 6%. Its modified duration is closest to:
- A.7.63
- B.6.99
- C.6.79
- D.7.20
Answer: C. Modified duration = Macaulay duration / (1 + yield per period) = 7.2 / 1.06 = 6.79. Multiplying instead gives 7.63.
5. A bond has modified duration of 8 and convexity of 90. If its yield rises by 50 basis points, its price changes by about:
- A.-4.11%
- B.-3.78%
- C.-3.89%
- D.-4.00%
Answer: C. %dP = -8 x 0.005 + 0.5 x 90 x 0.005^2 = -4.00% + 0.11% = -3.89%. Convexity cushions the fall; 4.11% subtracts the convexity term.
6. Compared with an otherwise identical straight bond, a callable bond at low yields tends to show:
- A.Negative convexity
- B.A higher price
- C.A longer effective duration
- D.Higher positive convexity
Answer: A. As yields fall the call becomes likely and the price is capped near the call price, so the price-yield curve bends the wrong way: negative convexity.
7. The value of a putable bond equals the value of an otherwise identical straight bond:
- A.With no adjustment
- B.Minus the value of the put
- C.Minus the value of a call
- D.Plus the value of the put
Answer: D. The put belongs to the bondholder, who can sell the bond back to the issuer, so it adds value. A call belongs to the issuer and is subtracted.
8. A bond has a 2% probability of default over the next year and an expected recovery rate of 40%. Its expected loss is:
- A.1.4%
- B.1.2%
- C.0.8%
- D.2.0%
Answer: B. Expected loss = probability of default x loss given default = 2% x (1 - 40%) = 1.2%. 0.8% uses the recovery rate instead of the loss rate.
9. An issuer is rated BBB. Its subordinated unsecured bonds would most likely be rated:
- A.AAA if long dated
- B.Below the issuer rating
- C.Above the issuer rating
- D.The same as the issuer
Answer: B. Agencies notch issue ratings by seniority: senior secured debt may be rated above the issuer rating and subordinated debt below it, since recovery is lower.
10. A bond indenture clause that prohibits the issuer from pledging assets to other lenders is a:
- A.Call provision
- B.Sinking fund provision
- C.Affirmative covenant
- D.Negative covenant
Answer: D. Negative covenants limit what the issuer may do, such as adding secured debt. Affirmative covenants require actions, such as paying interest and keeping insurance.
Practice all 24 fixed income questions, and the rest of the 200-question bank, in the free CFA Level I training sets. Questions you miss come back until you have mastered them.
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