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CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 72)
Updated On: 2-Jan-2026

Page 72 of 496
PDF with 3963 Questions

Eric Webb, an individual investor in a high tax bracket, would like to purchase a 5-year zero-coupon security with no credit risk. His investment adviser has recommended U.S. Treasury STRIP securities, and has told Webb that either coupon strips or principal strips would meet his needs. Which of the following statements is TRUE regarding the investment adviser's recommendation?

  1. While principal strips have no credit risk, there is credit risk in coupon strips.
  2. The adviser should have informed Webb that the principal strips have higher reinvestment risk than the coupon strips.
  3. The adviser should have informed Webb that STRIP securities may have negative tax consequences related to accrued interest.

Answer(s): C



Jeff Stone, CFA, is evaluating a newly issued mortgage backed security for his bond portfolio. Stone expects interest rates to rise gradually over the next few years. If Stone's interest rate forecast is correct, prepayment risk of the mortgage backed security:

  1. will fall to zero, as borrowers will have no incentive to prepay their loans.
  2. will increase, as curtailments become more likely.
  3. will decrease, although prepayments will still occur.

Answer(s): C



An analyst stated that the purpose of a collateralized mortgage obligation is to redistribute prepayment risk among investors with different risk tolerances while at the same time reducing total prepayment risk for all tranches in the structure. The analyst's statement is correct:

  1. only with respect to redistribution of risk
  2. only with respect to reducing total prepayment risk
  3. with respect to both redistribution of risk and reducing total prepayment risk

Answer(s): A



Jorge FuIIen is evaluating a 7% 10-year bond that is callable at par in 5 years. Coupon payments can be reinvested at an annual rate of 7%, and the current price of the bond is $106.50. The bond pays interest semiannually. Should Fullen consider the yield to first call (YTC) or the yield to maturity (YTM) in making his purchase decision?

  1. YTM, since YTM is greater than YTC.
  2. YTC, since YTC is less than YTM
  3. YTC, since YTC is greater than YTM.

Answer(s): B



PRC International just completed a S234 million floating rate convertible bond offering. As stated in the indenture, the interest rate on the bond is the lesser of 90-day LIBOR or 10%. The indenture also requires PRC to retire $5.6 million per year with the option to retire as much as $10 million. Which of the following embedded options is most likely to benefit the investor? The:

  1. 10% cap on the floating interest rate.
  2. accelerated sinking fund provision for principal repayment.
  3. conversion option on the convertible bonds

Answer(s): C



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



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