Practice quiz · by a Quizcard user

CFA Level I: Fixed Income and Equity Essentials — quiz

15 multiple-choice questions covering Bond Features & Types, Yield Measures, Price-Yield Relationship, Duration & Convexity, Credit Risk & Ratings. One answer each; you get a score at the end and the explanation for every question. No account needed.

Updated 2026-11-04. Keys 1–4 pick an answer, Enter moves on. Redo it any time, in order or shuffled.

The questions

Answers and explanations are shown after you finish.

1. Bond Features & Types

   An investor wants a bond whose price stays close to par value between coupon dates even as market interest rates fluctuate. Which bond feature best achieves this goal?

   • A floating-rate note whose coupon resets periodically to a reference rate plus spread
   • A fixed-rate convertible bond
   • A fixed-rate callable bond
   • A zero-coupon bond held to maturity
2. Bond Features & Types

   A bond issuer wants the flexibility to refinance debt if interest rates decline significantly, while investors who buy the bond want compensation for giving up that flexibility to the issuer. Which embedded option is present, and how does it affect pricing relative to an otherwise identical option-free bond?

   • A put option held by the investor, causing the bond to trade at a higher price
   • A call option held by the issuer, causing the bond to trade at a higher price
   • A conversion option held by the investor, causing the bond to trade at a higher price
   • A call option held by the issuer, causing the bond to trade at a lower price (higher yield)
3. Yield Measures

   A bond pays an $80 annual coupon and currently trades at $1,250. Approximately what is its current yield?

   • 6.4%
   • 8.0%
   • 15.6%
   • 10.0%
4. Yield Measures

   Which assumption is embedded in the standard yield-to-maturity calculation for a coupon bond?

   • Coupons are reinvested at the bond's coupon rate
   • The yield curve is flat across all maturities
   • Coupons are reinvested at the computed YTM and the bond is held to maturity
   • The bond is sold at the first call date
5. Price-Yield Relationship

   For a given basis-point change in yield, how does the magnitude of a bond's price increase (from falling yields) compare to its price decrease (from an equal-size rise in yields)?

   • They are equal in magnitude because the price-yield relationship is linear
   • It depends only on the coupon rate, not on convexity
   • The price decrease is larger than the price increase, due to negative convexity
   • The price increase is larger than the price decrease, due to positive convexity
6. Duration & Convexity

   A 10-year zero-coupon bond has a Macaulay duration of approximately how many years, and why?

   • It cannot be determined without knowing the yield level
   • 5 years, because duration is always half of maturity
   • Less than 10 years, because the discount factor reduces duration below maturity
   • 10 years, because all cash flow occurs at maturity so the weighted-average time equals maturity
7. Duration & Convexity

   Why must effective duration, rather than modified duration, be used to estimate the interest-rate sensitivity of a callable bond?

   • Modified duration can only be calculated for zero-coupon bonds
   • Effective duration ignores the time value of money
   • Callable bonds have no yield to maturity
   • The bond's expected cash flows change as yields change, which only effective duration captures via a pricing model
8. Credit Risk & Ratings

   A bond rated Ba1 by Moody's and BB+ by S&P would be classified as:

   • High-yield (speculative grade)
   • Default grade
   • Investment grade, just above the cutoff
   • Equivalent to Baa3/BBB−
9. Term Structure

   According to liquidity preference theory, why do yield curves tend to be upward sloping even when the market does not expect future short-term rates to rise?

   • Forward rates are unbiased predictors of future spot rates under this theory
   • Long-term bonds have lower default risk than short-term bonds
   • Investors demand a premium for holding longer-maturity bonds, biasing forward rates upward
   • Market segmentation forces long-term yields higher
10. Securitization

    Why does a mortgage pass-through security often exhibit negative convexity when interest rates fall sharply?

    • Falling rates eliminate the mortgage pool's credit risk entirely
    • Falling rates trigger accelerated borrower prepayments, shortening the security's expected life and capping price appreciation
    • Falling rates increase the coupon rate on the pass-through, raising price without limit
    • Falling rates cause the special purpose entity to default on payments
11. Equity Market Organization

    An investor places an order to buy shares specifying she will pay no more than $50 per share. If the stock is trading at $52, what happens to her order?

    • It is automatically canceled because limit orders cannot specify a price below the market
    • It executes at $50 only if it was submitted as a market order
    • It executes immediately at $52, the best available price
    • It remains unexecuted until the price reaches $50 or lower, if ever
12. Indices

    A company in a price-weighted index executes a 2-for-1 stock split, with no change in total market value. What happens to the stock's influence on the index?

    • It is cut roughly in half because its price—and thus its weight—is halved
    • It becomes impossible to include the stock in the index
    • It stays the same because index weights are based on market capitalization
    • It doubles because the number of shares outstanding doubles
13. Market Efficiency

    Under the semi-strong form of the Efficient Market Hypothesis, which type of analysis would be expected to fail at consistently generating abnormal returns?

    • Analysis based on insider, non-public information
    • Analysis based only on historical price and volume data
    • Analysis based on publicly available information, such as fundamental analysis
    • Analysis using both insider information and public information
14. Equity Valuation

    Using the Gordon growth model, what happens to a stock's estimated intrinsic value if the required rate of return r decreases while the growth rate g and current dividend stay constant (assuming r remains greater than g)?

    • The model becomes undefined regardless of the relative size of r and g
    • Intrinsic value decreases because the denominator decreases
    • Intrinsic value increases because the denominator (r − g) decreases, increasing the formula value
    • Intrinsic value is unaffected since only D1 matters
15. Industry Analysis

    An industry has very low barriers to entry, powerful suppliers able to dictate input prices, and intense rivalry among many similarly sized competitors. Based on Porter's Five Forces framework, what would analysts generally expect for this industry's profitability?

    • Compressed profitability, because weak barriers, high supplier power, and intense rivalry all squeeze margins
    • Higher profitability because competition drives innovation and reduces costs for all firms
    • High and stable profitability due to strong competitive differentiation
    • Profitability unaffected, since Porter's forces apply only to new entrants