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.
Money duration of a bond position is best described as:
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Correct Answer: A
Solution
A is correct. Money duration (also called dollar duration) rescales the percentage sensitivity given by modified duration into a currency amount by multiplying modified duration by the full price of the position: MoneyDur=AnnModDur×PVFull Multiplying money duration by the change in yield, expressed as a decimal, estimates the currency change in the position's value: ΔPVFull≈−MoneyDur×ΔYield A 100 bp change is ΔYield=0.01 (1%), so the estimated value change is 1% of money duration. The measure is therefore expressed in money terms rather than in percent.
Question 2
Medium
A bond's coupon rate is the:
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Correct Answer: B
Solution
B 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.
Question 3
Hard
Bootstrapping is a method used to derive:
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Correct Answer: B
Solution
B is correct.
Bootstrapping is a sequential process used to derive the spot rate curve from the yields on coupon-paying (par) bonds. Starting with the shortest maturity, each spot rate is calculated using previously derived shorter-term spot rates.
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