- 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

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**CFA Practice Question**

Which of the following statements is (are) true with respect to bond valuation?

II. The arbitrage-free valuation approach discounts each cash flow of a bond using a different discount rate.

III. As the required yield to maturity increases, the discount on a zero-coupon bond will decrease.

IV. If the yield to maturity on a bond is greater than its coupon rate, the bond will trade below par.

I. Spot rates are equal to the yield to maturity of on-the-run coupon-paying Treasury securities.

II. The arbitrage-free valuation approach discounts each cash flow of a bond using a different discount rate.

III. As the required yield to maturity increases, the discount on a zero-coupon bond will decrease.

IV. If the yield to maturity on a bond is greater than its coupon rate, the bond will trade below par.

A. II and IV

B. II and III

C. I, III, and IV

**Explanation:**I is incorrect. Spot rates are equal to the yield to maturity of on-the-run zero-coupon Treasury securities.

III is incorrect. As the required yield to maturity increases, the discount on a zero-coupon bond will become even greater. The larger the discount a bond is trading at, the greater will be the built-in required yield to maturity.

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