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CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 71)
Updated On: 2-Jan-2026

Page 71 of 496
PDF with 3963 Questions

The interest expense on a discount bond _______ over time.

  1. decreases
  2. remains constant
  3. can increase or decrease, depending on interest rate movements
  4. increases

Answer(s): D

Explanation:

Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a discount, the discount amount is amortized over the life of the bond. The outstanding liability thus increases steadily toward the face value. The increasing liability increases the interest expense over time.



An analyst has been researching a possible investment in collateralized debt obligations (CDOs). Identify the statement which is most likely correct.

  1. The underlying securities for a CDO are typically issued only by U.S.-based entities.
  2. A CDO with corporate bonds as the underlying security is known as a collateralized loan obligation (CLO).
  3. A CDO is typically structured into tranches, similar to a collateralized mortgage obligation (CMO).

Answer(s): C



Chris South owns $25,000 face value of Bradco bonds, which have a 7% coupon, pay interest semiannually, and have six years remaining until maturity. The bonds are callable at par. The bonds were rated A when Chris bought them at par two years ago, and they are currently worth $26,225, with a rating of AA. Which of the following statements most accurately describes the change in the risk of the Bradco bonds?

  1. Call risk has decreased.
  2. Liquidity risk has increased.
  3. Credit risk has decreased.

Answer(s): C



Ned Jameson. CFA, is considering the purchase of a newly issued asset-backed security (ABS) for his fixed income portfolio. According to the broker/dealer offering the bond, the OAS for the issue is 75 basis points (bps). Based on the OAS value, which of the following assumptions can Jameson make about this particular ABS?

  1. The OAS represents the investor's compensation for credit risk, liquidity risk, and option risk.
  2. The bond is trading at a yield that is more than 75 bps higher than a Treasury security with a comparable maturity.
  3. The implied cost of an option embedded in the security is always equal to the difference between the OAS and the Treasury spread.

Answer(s): B



With regard to a theoretical Treasury yield curve constructed with the bootstrapping method:

  1. every point on the curve is constructed by utilizing current on-the-run Treasury yields of various maturities.
  2. the yield for most maturities used to construct the Treasury yield curve are observed yields rather than interpolated yields.
  3. any yield on the Treasury yield curve that is not one of the on-the-run maturities is only an approximation for that maturity.

Answer(s): C



An analyst is evaluating an annual-pay bond with a yield to maturity of 7.0%. The bond-equivalent yield of this bond is:

  1. equal to 7.0%
  2. less than 7.0%
  3. greater than 7.0%

Answer(s): B



An economist has forecast that the term structure of interest rates will remain perfectly flat. According to the liquidity preference theory, the economist's forecast implies that future short-term interest rates will:

  1. decrease over time
  2. increase over time
  3. equal current short-term interest rates

Answer(s): A



Identify the most accurate statement regarding collateralized borrowing transactions.

  1. Repurchase agreements usually offer the lowest interest cost.
  2. Margin buying usually allows for borrowing a higher percentage of the collateral value.
  3. Margin buying is usually the preferred transaction structure for institutional bond investors.

Answer(s): A



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