CFA Level 1 Practice Questions — All Questions

When market interest rates rise, the price of an existing fixed-rate bond generally:

• a.Rises
• b.Falls✓
• c.Doubles
• d.Stays the same

Bond prices move inversely to interest rates.

Duration is best described as a measure of a bond's:

• a.Issue size
• b.Sensitivity to interest-rate changes✓
• c.Credit rating
• d.Coupon frequency

Duration estimates price sensitivity to interest-rate changes.

Diversification reduces which type of risk?

• a.Inflation entirely
• b.Systematic (market) risk
• c.Unsystematic (firm-specific) risk✓
• d.Interest-rate risk of every bond

Diversification reduces unsystematic, firm-specific risk, not systematic market risk.

A common valuation approach for equities discounts expected future:

• a.Coupons only
• b.Sunk costs
• c.Cash flows or dividends✓
• d.Book values

Equity valuation often discounts expected future cash flows or dividends to present value.