Free CFA Level I Fixed Income Practice Questions
Fixed income on the CFA Level I exam covers bond pricing, yield measures, interest rate risk, credit analysis, and the term structure of interest rates. Weighted 11-14% (CFA Institute), making it one of the largest topics.
Sample Questions
Question 1
Easy
A discount margin (DM) is the yield spread most applicable to which instrument, and what rate does it supplement?
Solution
A is correct.
The discount margin (DM) is the spread over the reference interest rate (such as SOFR or LIBOR) required to make a floating-rate note's discounted cash flows equal to its market price. The FRN's coupon = Reference rate + quoted margin. The DM is the market-required spread that equates the PV of expected cash flows to the current price. When the FRN prices at par, DM equals the quoted margin.
The discount margin (DM) is the spread over the reference interest rate (such as SOFR or LIBOR) required to make a floating-rate note's discounted cash flows equal to its market price. The FRN's coupon = Reference rate + quoted margin. The DM is the market-required spread that equates the PV of expected cash flows to the current price. When the FRN prices at par, DM equals the quoted margin.
Question 2
Medium
A bond's coupon rate is the:
Solution
A is correct.
The coupon rate is the stated annual interest rate expressed as a percentage of the bond's par (face) value. It determines the fixed periodic coupon payments.
The coupon rate is the stated annual interest rate expressed as a percentage of the bond's par (face) value. It determines the fixed periodic coupon payments.
Question 3
Hard
Loss given default (LGD) is best described as:
Solution
B is correct.
Loss given default represents the proportion of a bond's value (including principal and unpaid interest) that investors expect to lose in the event of default. LGD = 1 - Recovery rate.
Loss given default represents the proportion of a bond's value (including principal and unpaid interest) that investors expect to lose in the event of default. LGD = 1 - Recovery rate.