A candidate stares at a bond question. It’s callable and trading at a premium. They correctly calculate the yield-to-maturity (YTM) as 6.18% and the yield-to-call (YTC) as 5.95%. Feeling the time pressure, they select 6.18%, thinking an investor always wants the higher potential return. That single, seemingly logical choice just cost them points, moving them one step closer to the wrong side of the pass line. The examiner wasn't testing calculation; they were testing judgment under uncertainty.
These 10 free CFA Level I Fixed Income practice questions mirror the 2026 exam by testing judgment on bond valuation, yield-to-worst, duration, and credit risk. Each question includes a detailed explanation that breaks down common exam traps and the precise calculation steps required to pass.
Key facts
- Topic area
- Fixed Income
- Blueprint weight
- 11-14% (approx. 20-25 questions)
- Official body
- CFA Institute
- Passing score
- Variable; the CFA Institute sets a Minimum Passing Score (MPS) after each exam administration based on a standard-setting process.
- Key concepts
- Valuation, duration, convexity, credit analysis, securitization
- Study hours
- 40-50 hours (out of 300+ total for CFA Level I)
The CFA Institute reports a 10-year average pass rate for Level I of 40% (CFA Institute), which underscores the exam's difficulty.
Understanding Key Fixed Income Spreads
Before you attempt the questions, it's crucial to distinguish between the primary yield spreads. The exam will test your ability to select the right tool for the job.
| Spread Type | Description | When to Use |
|---|---|---|
| G-Spread | The spread over an interpolated government bond yield. A simple, direct comparison to a risk-free benchmark. | For non-callable corporate bonds when you need a quick benchmark against an actual government bond. |
| Z-Spread | The constant spread added to each point on the Treasury spot-rate curve to make a bond's discounted cash flows equal its price. | For non-callable bonds when you need a more precise measure that accounts for the entire spot-rate curve. |
| OAS | The spread over the Treasury spot-rate curve after adjusting for the value of an embedded option. | For bonds with embedded options (e.g., callable or putable bonds) to isolate pure credit and liquidity risk. |
What These Fixed Income Questions Test
This set of 10 questions is a diagnostic tool designed to mirror the difficulty and topic spread of the CFA Level I exam. They cover the essential concepts from bond features and valuation to risk and return, forcing you to apply judgment, not just recall formulas.
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Every question aligns with the current CFA Institute blueprint. If you find yourself guessing or falling for the distractors, it's a clear signal to revisit that topic. For a comprehensive review, you can start a free 14-day trial of VoraPrep's complete CFA course.
Answer the following questions under exam-like conditions. The detailed explanations that follow are where the real learning happens.
Fixed Income Practice Questions
Question 1
A 10-year, $1,000 par value bond with an 8% annual coupon is currently trading at $1,150. The bond is first callable in 5 years at a call price of $1,050. The bond's yield-to-worst is closest to:
Question 2
Which of the following statements about bond indentures is most accurate?
Question 3
An analyst is evaluating a zero-coupon bond with a par value of $1,000 that matures in 7 years. If the appropriate market discount rate is 5.5% compounded semi-annually, the current price of this bond is closest to:
Question 4
A bond has a modified duration of 6.5 and a convexity of 55. If market yields increase by 75 basis points (0.75%), the estimated percentage change in the bond's full price is closest to:
Question 5
A corporate bond pays coupons on April 1 and October 1. An investor purchases this bond with a settlement date of June 15. The number of days of accrued interest the buyer must pay the seller is closest to:
Question 6
An investor is considering two bonds. Bond A is a 5-year Treasury bond. Bond B is a 5-year corporate bond issued by a stable, blue-chip company with no embedded options. Which of the following spreads is the primary measure of the additional yield an investor receives for holding Bond B instead of Bond A?
Question 7
Which of the following events would most likely cause a bond's price to increase?
Question 8
Consider a 15-year, $1,000 par, 6% semi-annual coupon bond. If the bond's yield-to-maturity is 7%, its price is closest to:
Question 9
The "four Cs" are a common framework for evaluating credit quality. Which of the following is NOT one of the four Cs?
Question 10
Which of the following mortgage-backed securities (MBS) has the lowest level of contraction risk?
Answer Key and Explanations
Answer and Explanation for Question 1
Correct Answer: A (5.95%)This question tests your understanding of yield-to-worst (YTW), a critical concept for callable bonds.
The Decision Tree
- Is the bond callable? Yes.
- Is it trading at a premium or discount? The price is $1,150, a premium to the $1,000 par value.
- What does this imply? An issuer is more likely to call a bond trading at a premium. The bond's 8% coupon is higher than current market rates (which is why the price is high). The issuer can save money by calling the bond and reissuing new debt at a lower rate.
- Conclusion: For a bond trading at a premium, the YTW is the lower of the YTM and the YTC.
The Calculation
- Yield-to-Call (YTC):
- N = 5 (years until first call)
- PV = -1150 (current price)
- PMT = 80 (8% of $1,000 par)
- FV = 1050 (the call price)
- CPT I/Y = 5.95%
- Yield-to-Maturity (YTM):
- N = 10
- PV = -1150
- PMT = 80
- FV = 1000
- CPT I/Y = 6.18%
The lower of the two yields is 5.95%. This is the yield-to-worst.
- Why B is wrong: 6.18% is the YTM. It's a plausible yield but not the most conservative (worst) one given the call feature and premium price.
- Why C is wrong: 8.00% is the coupon rate, which is a descriptive feature, not a measure of yield.
Answer and Explanation for Question 2
Correct Answer: CThis is a foundational concepts question. The indenture is the master legal document governing a bond issue.
- Why C is right: It provides the most accurate and complete definition. It outlines all the terms, conditions, and obligations.
- Why A is wrong: It reverses the definitions. Negative covenants restrict actions (like selling key assets). Affirmative covenants require actions (like filing financial statements).
- Why B is wrong: It also reverses the definitions. Restricting the issuance of more senior debt is a classic negative covenant, not an affirmative one.
Answer and Explanation for Question 3
Correct Answer: A ($683.35)This tests your ability to value a zero-coupon bond, with the common twist of semi-annual compounding.
The Calculation
- Face Value (FV) = $1,000
- Market Rate (I/Y) = 5.5%
- Years to Maturity (N) = 7
- Compounding Periods per Year = 2
You must adjust the rate and number of periods for semi-annual compounding:
- Periodic Rate = 5.5% ÷ 2 = 2.75%
- Number of Periods = 7 years × 2 = 14 periods
Price = $1,000 ÷ (1 + 0.0275)¹⁴ = $1,000 ÷ 1.46337 = $683.35
- Why B is wrong: $685.99 is the result of using annual compounding with 14 periods, a nonsensical combination.
- Why C is wrong: $708.92 is the result of using annual compounding ($1,000 / (1.055)⁷). This ignores the "compounded semi-annually" instruction and is a common trap for candidates rushing through the problem.
Answer and Explanation for Question 4
Correct Answer: A (-4.72%)This question tests your ability to apply both duration and convexity to estimate a bond's price change.
The Calculation
- Modified Duration (ModDur) = 6.5
- Convexity = 55
- Change in Yield (ΔYield) = +0.0075 (75 basis points)
- Duration Effect: -6.5 × 0.0075 = -0.04875 or -4.875%
- Convexity Effect: 0.5 × 55 × (0.0075)² = 27.5 × 0.00005625 = +0.001546875 or +0.155%
- Why B is wrong: -4.88% is the price change estimated using only duration. This ignores the second-order effect of convexity, which is required for larger yield moves and is a key concept tested at Level I.
- Why C is wrong: This is likely the result of a calculation error, such as subtracting the convexity adjustment instead of adding it.
Answer and Explanation for Question 5
Correct Answer: A (75 days)This tests your knowledge of day-count conventions, specifically 30/360, which is the standard for U.S. corporate bonds.
The Calculation
In a 30/360 world, every month is treated as having 30 days.- Last coupon date: April 1
- Settlement date: June 15
- Full days in April (from April 1): 30 days
- Full days in May: 30 days
- Days in June (up to June 15): 15 days
- Why B is wrong: 76 days might be the result of using an actual/actual day count (April has 30 days, May has 31) and miscounting. The key is to see "30/360" and strictly apply that rule.
- Why C is wrong: This number doesn't correspond to a logical calculation method and is a distractor.
Answer and Explanation for Question 6
Correct Answer: A (G-spread)This is a definitions question about yield spreads, testing if you know which spread applies to which situation.
- Why A is right: The G-spread (Government spread) is the spread over an actual government bond yield curve, typically using an interpolated Treasury yield for the specific maturity. This is the direct, primary comparison for a corporate bond against its risk-free benchmark.
- Why B is wrong: The Z-spread is more precise but is calculated against the entire spot-rate curve, not a single benchmark bond. The G-spread is the more direct answer to the question as phrased.
- Why C is wrong: The Option-Adjusted Spread (OAS) is used for bonds with embedded options. The question explicitly states Bond B has no embedded options, making OAS an inappropriate measure.
Answer and Explanation for Question 7
Correct Answer: CThis question tests the fundamental drivers of bond prices. Remember the inverse relationship between risk/yields and price.
- Why C is right: Stronger earnings and cash flow reduce the company's credit risk (specifically, its default risk). A lower perceived risk means investors will demand a lower yield to hold the bond. A lower yield translates directly to a higher bond price.
- Why A is wrong: A credit rating downgrade signifies increased risk. This would cause the bond's required yield to rise, pushing its price down.
- Why B is wrong: An increase in the policy rate pushes up the entire structure of market yields. This makes the existing bond's fixed coupon less attractive, causing its price to fall.
Answer and Explanation for Question 8
Correct Answer: A ($908.33)This is a classic bond valuation problem requiring careful use of a financial calculator.
Step 1: Adjust inputs for semi-annual payments
- N (Number of periods): 15 years × 2 = 30
- I/Y (Periodic yield): 7% YTM ÷ 2 = 3.5%
- PMT (Periodic coupon payment): (6% × $1,000) ÷ 2 = $30
- FV (Face value): $1,000
Step 2: Calculate the Present Value (PV)
Using a financial calculator:- N = 30
- I/Y = 3.5
- PMT = 30
- FV = 1000
- CPT PV = -908.33
The price of the bond is $908.33. The bond's coupon rate (6%) is less than its YTM (7%), so it must trade at a discount to par ($1,000).
- Why B is wrong: This is a distractor based on a slight miscalculation, often from inputting one of the variables incorrectly.
- Why C is wrong: $1,106.78 is a premium price. You can eliminate this answer without any calculation. Since the coupon is less than the yield, the price must be less than par.
Answer and Explanation for Question 9
Correct Answer: D (Capital)This tests your recall of the standard credit analysis framework. The four Cs are:
- Capacity: The borrower's ability to make its debt payments from operating cash flows.
- Collateral: The quality and value of assets pledged against the debt.
- Covenants: The terms and conditions of the lending agreement that protect the lender.
- Character: The quality of management and its reputation for paying its debts.
"Capital" is not one of the four Cs, although it is related to a company's overall financial health and its capacity to repay debt.
Answer and Explanation for Question 10
Correct Answer: AThis question is about prepayment risk in MBS, which has two sides: contraction risk and extension risk.
- Contraction Risk: The risk that homeowners will prepay their mortgages faster than expected, typically when interest rates fall. This forces the MBS investor to reinvest their principal at lower rates.
- Why A is right: A Planned Amortization Class (PAC) tranche is specifically designed to provide predictable cash flows by absorbing prepayment variability from underlying mortgages via support tranches. It offers the most protection against both contraction and extension risk among the choices.
- Why B is wrong: An Interest-Only (IO) strip is extremely sensitive to prepayments. When rates fall and prepayments spike, the principal balance disappears faster, and so do the future interest payments the IO holder is entitled to. IOs have very high contraction risk.
- Why C is wrong: A Principal-Only (PO) strip benefits from faster prepayments. When rates fall, the PO investor gets their principal back sooner, increasing their return. It has negative contraction risk, but it is not "protected" from cash flow volatility in the way a PAC tranche is.
Calculate Your CFA Level 1 Score & Study Hours by Domain
Adjust your practice scores across official CFA Level 1 blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
Interpreting Your Score
Tally your correct answers and analyze the pattern of your mistakes.
- 8-10 Correct: You have a strong command of core Fixed Income concepts. Your focus should be on speed and mastering more complex, multi-step problems under timed conditions.
- 5-7 Correct: You have a decent foundation but clear knowledge gaps. If you missed calculation questions (#3, #8), drill your time-value-of-money skills. If you missed conceptual questions (#2, #6), you need to review the definitions and frameworks.
- 0-4 Correct: This indicates a fundamental misunderstanding. Fixed Income is a significant portion of the exam. Your next step should be a full review of the Fixed Income material from the ground up using a structured study program.
More practice is the only path forward. A 10-question quiz is a snapshot; a full question bank builds the deep, instinctual knowledge needed to pass. You can find more resources in our guide to CFA Level I practice questions and exam simulators.
How VoraPrep Helps You Master Fixed Income
If you struggled with the "why" behind the answers or fell for the tempting distractors, you need a more robust practice environment. Passing the CFA exam requires active problem-solving, not passive viewing.
This is where VoraPrep's complete 6-pillar course excels over legacy providers who rely on hours of passive video lectures.
- Textbook-Grade Lessons: We teach concepts like the yield-to-worst decision tree interactively, so you learn the judgment, not just the formula.
- Adaptive Practice Bank: With over 2,500 questions, our engine learns your weak spots and serves you more questions on topics like convexity or MBS until you master them.
- 1:1 Exam Simulators: Our mock exams replicate the look and feel of the real Prometric test center, eliminating surprises on exam day.
- Spaced-Repetition Flashcards: For memorizing key definitions like the four Cs of credit, our flashcard system schedules reviews based on memory science.
- Personalized Study Plan: Our platform builds a dynamic calendar around your exam date and schedule, keeping you on track.
- Vory, Your 24/7 Tutor: Stuck on a question at 2 AM? Ask Vory. It will walk you through the problem step-by-step, ensuring you truly understand the logic.
See how this active learning model compares to older methods in our VoraPrep vs. Kaplan Schweser for CFA Level 1 analysis.