- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 2. Relationships between Bond Price and Bond Characteristics
CFA Practice Question
Which of the following statements is (are) true with respect to the nature of bonds?
II. For discount bonds, the duration equals the maturity of the bond.
III. Since longer-term interest rates are more stable than shorter term interest rates, longer term bonds are less price sensitive than shorter-term bonds.
IV. Not even U.S. government bonds are immune from interest rate risk.
I. For premium bonds, yield to maturity is always lower than its current yield.
II. For discount bonds, the duration equals the maturity of the bond.
III. Since longer-term interest rates are more stable than shorter term interest rates, longer term bonds are less price sensitive than shorter-term bonds.
IV. Not even U.S. government bonds are immune from interest rate risk.
A. I and IV
B. II and III
C. I, II, III and IV
Explanation: I is true. The reason a bond trades above par is because it is paying a coupon rate that is greater than what the market requires (which is represented through yield to maturity).
II is incorrect. The only instance where the bond duration equals its maturity is if the bond is a zero coupon bond, an extreme form of a discount bond.
User Contributed Comments 4
| User | Comment |
|---|---|
| DiscoAfro | Is current yield the same as coupon rate? I thought current yield is the coupon divided by the bond value, i.e. price. |
| thekid | DiscoAfro: I was thinking the exact same thing. Current yield = coupon/bond value Therefore... current yield = ytm Someone PLEASE correct me. |
| jpducros | current yield = coupon/bond value but ytm is different |
| anaraguin | coupon rate = nominal rate |