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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 115 )

Updated On: 26-Jan-2026
Page 115 of 793
PDF with 3960 Questions

Richard Wallace manages a portfolio of fixed-income securities for a large multinational investment firm. Wallace's portfolio is exposed to reinvestment risk, which he is attempting to reduce by adding securities with low levels of reinvestment risk. Of the following bonds, Wallace should most appropriately choose:

  1. a mortgage-backed security with scheduled principal and interest payments
  2. an 8%, 10-year Treasury bond with semiannual payments
  3. a 15-year Treasury strip.

Answer(s): C



Siegel, Inc. has issued bonds maturing in 15 years but callable at any time after the first 8 years. The bonds have a coupon rate of 6%, and are currently trading at $992 per $ 1,000 par value. If interest rates decline over the next few years:

  1. the call option embedded in the bonds will increase in value, but the price of the bond will decrease.
  2. the price of the bond will increase, but probably by less than a comparable bond with no embedded option.
  3. the price of the bond will increase, primarily as a result of the increasing value of the call option.

Answer(s): B



Bond X carries a rating of BBB-/Baa3. Bond Y has a rating of B/B2. Both bonds are callable after five years, and both bonds mature in ten years. Identify the most accurate statement regarding the credit risk of these bonds. Which bond's value would be most affected by a ratings downgrade, and which bond has the higher default risk?

  1. Bond X would be more affected by a ratings downgrade, but Bond Y has higher default risk.
  2. Bond Y would be more affected by a ratings downgrade, but Bond X has higher default risk.
  3. Bond X has higher default risk, but both bonds would feel equivalent effects of a ratings downgrade.

Answer(s): A



Karen Callaway is an investor in the 35% tax bracket. She is evaluating a tax-exempt municipal security with a tax-exempt yield of 4.5%. What is the taxable equivalent yield (TEY) of the municipal security?

  1. 2.9%.
  2. 6.9%.
  3. 12.9%.

Answer(s): C

Explanation:



Ron Logan, CFA, is a bond manager. He purchased $50 million in 6.0% coupon Southwest Manufacturing bonds at par three years ago. Today, the bonds are priced to yield 6.85%. The bonds mature in nine years. Identify the most accurate statement regarding the pricing and yield of these bonds.

  1. The bonds are trading at a discount, and the yield to maturity (YTM) has increased since purchase.
  2. The bonds are trading at a premium, and the yield to maturity (YTM) has decreased since purchase.
  3. The bonds are trading at a discount and the yield to maturity (YTM) has decreased.

Answer(s): A



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