Free CISI CWM FM Practice Questions: Bond Markets and Valuation

CISI means Chartered Institute for Securities & Investment. CWM means Chartered Wealth Manager, and this page is for the Financial Markets paper. Use this focused CISI CWM Financial Markets page as a short practice test for Bond Markets and Valuation. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A wealth manager records two bond holdings immediately after all 31 December 2026 coupons have been paid. The coupon rate is quoted per annum.

Ignoring accrued interest, tax, default, and reinvestment, which 2027 coupon cash-flow schedule is correct?

• A. UK gilt: £6,000 on 30 June and £6,000 on 31 December; sterling eurobond: £6,000 on 31 December.
• B. UK gilt: £6,000 on 31 December only; sterling eurobond: £3,000 on 30 June and £3,000 on 31 December.
• C. UK gilt: £3,000 on 31 December only; sterling eurobond: £6,000 on 30 June and £6,000 on 31 December.
• D. UK gilt: £3,000 on 30 June and £3,000 on 31 December; sterling eurobond: £6,000 on 31 December.

Best answer: D

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: A stated coupon rate is normally an annual rate applied to the bond’s nominal value. For £100,000 nominal with a 6% coupon, the total annual coupon is £6,000. A semi-annual convention does not double the annual coupon; it divides the annual coupon into two payments, so the gilt pays £3,000 on each coupon date. An annual convention pays the full annual coupon once, so the sterling eurobond pays £6,000 on 31 December. The total annual coupon cash from the two holdings is £12,000, but the timing differs because of the coupon conventions.

• Paying £6,000 at each semi-annual date treats the annual coupon as if it were earned twice in full.
• Swapping the conventions misses that the gilt is semi-annual and the eurobond is annual.
• Halving the annual eurobond coupon or giving it two full annual payments conflicts with the stated annual coupon convention.

A 6% annual coupon on £100,000 is £6,000, split into two £3,000 payments for the semi-annual gilt and paid once for the annual eurobond.

Question 2

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A sterling bond fund is reviewing whether to extend duration after a change in the UK government zero-coupon curve.

Market extract:

Dealer note:

• The implied 1-year forward rate starting in 1 year is below today’s 1-year spot rate.
• The implied 1-year forward rate starting in 2 years is also below today’s 1-year spot rate.

Which interpretation should the investment committee use?

• A. The curve is normal because the 10-year spot rate is above the 3-year spot rate, so all longer bonds should have higher yields than shorter bonds.
• B. The forward rates prove that the Bank of England will cut rates, so the fund should move entirely into floating-rate notes.
• C. The front end of the curve is inverted, and the implied forward rates indicate that the market is pricing lower future short-term rates, but they are not guaranteed forecasts.
• D. The 2-year spot rate is the market’s forecast of the 1-year interest rate that will apply one year from now.

Best answer: C

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: A zero-coupon spot rate is the current yield for a single cash flow at a stated maturity. The shape from 1 to 3 years is downward sloping, so the front end is inverted. Forward rates are derived from spot rates and link returns across different investment horizons. If forward rates starting in future years are below the current 1-year spot rate, the curve is consistent with markets pricing lower short-term rates ahead. However, forward rates are not guaranteed future policy rates or certain forecasts; they may include term premia, liquidity effects, risk premia, and supply-demand pressures. The 10-year point being slightly above the 3-year point does not remove the front-end inversion.

• Treating the whole curve as normal overlooks the clear fall from 1-year to 3-year spot rates.
• Treating the 2-year spot rate as a future 1-year rate confuses spot rates with implied forward rates.
• Treating forward rates as proof of central bank action overstates what the curve can show and jumps to a product recommendation not supported by the facts.

The spot curve slopes downward from 1 to 3 years, and forward rates derived from it are market-implied break-even rates rather than certain predictions.

Question 3

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A wealth manager is updating the next 12-month fixed-income income ladder on 1 April 2027. Market yields have risen, but the task is to schedule contractual coupon receipts only, not mark-to-market movements.

Portfolio extract:

Assume no purchases or sales, no defaults, and ignore accrued interest, FX conversion, tax, and principal redemptions. The cash-flow ladder runs from 1 April 2027 to 31 March 2028 inclusive.

Which coupon-cash-flow entry is correct?

• A. Record £80,000 on 7 March 2028 for the gilt; record €60,000 on 25 May 2027 for the French bond.
• B. Record £40,000 on 7 September 2027 and £40,000 on 7 March 2028 for the gilt; record €60,000 on 25 May 2027 for the French bond.
• C. Record £40,000 on 7 September 2027 and £40,000 on 7 March 2028 for the gilt; record €30,000 on 25 May 2027 and €30,000 on 25 November 2027 for the French bond.
• D. Record £80,000 on 7 September 2027 for the gilt; record €60,000 on 25 May 2027 for the French bond.

Best answer: B

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: Coupon frequency affects the timing and size of cash receipts. A stated annual coupon rate is normally quoted per annum, but the payment frequency determines how that annual amount is distributed. The £2,000,000 gilt has a 4.00% annual coupon, so its annual coupon is £80,000. Because it is stated to pay semi-annually, each coupon is £40,000, with two receipts falling inside the 12-month ladder: 7 September 2027 and 7 March 2028. The €2,000,000 French bond has a 3.00% annual coupon, so its annual coupon is €60,000. Because it is stated to pay annually, only the 25 May 2027 receipt falls inside the period ending 31 March 2028.

• Treating the gilt as one £80,000 receipt ignores the stated semi-annual coupon convention.
• Splitting the French bond coupon into two payments incorrectly applies a semi-annual pattern to an annual-coupon bond.
• Moving the whole gilt coupon to March confuses the next coupon date with a single annual payment date.

The semi-annual gilt pays half its annual coupon twice within the period, while the annual French bond pays its full annual coupon once.

Question 4

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A UK charitable foundation is reviewing the bond allocation for a reserve that backs a specific future payment.

Case extract:

• The foundation expects to make a single payment in nine years.
• The payment amount is contractually increased each year in line with UK RPI.
• Trustees rank objectives in this order: inflation protection, liability matching, and capital preservation.
• The existing reserve is already diversified across sterling investment-grade corporate bonds and cash.
• The investment committee is willing to accept a low yield if the bond better matches the liability.

Which bond allocation is most suitable for this reserve?

• A. A five-year sterling BBB floating-rate note issued by a bank
• B. A nine-year UK index-linked gilt held close to maturity
• C. A nine-year unhedged US Treasury bond with a fixed dollar coupon
• D. A 30-year conventional gilt with a higher fixed coupon

Best answer: B

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: For a known sterling liability that rises with UK RPI, the strongest match is a UK index-linked gilt with a maturity close to the payment date. Its coupons and redemption value are adjusted for inflation, so it helps preserve the real value of the assets against the liability. Holding close to maturity also reduces the importance of interim price volatility, while the UK government issuer supports capital preservation relative to corporate credit. A low running yield is not decisive because the trustees have prioritised inflation protection and liability matching over income maximisation.

• The long conventional gilt offers fixed income but does not protect against RPI-linked liability growth and creates a large duration mismatch.
• The floating-rate note may reduce interest-rate sensitivity, but it has corporate credit risk, no direct inflation linkage, and a shorter maturity than the liability.
• The US Treasury has high sovereign credit quality, but the unhedged dollar exposure and fixed nominal coupon do not match a sterling RPI-linked obligation.

It most directly matches the RPI-linked sterling liability while keeping issuer credit risk low and reducing maturity mismatch.

Question 5

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A wealth manager is reviewing a conventional sterling corporate bond after a sharp fall in market yields.

Bond facts:

• Par value: £100
• Coupon: fixed 5.75% per year
• Maturity: 6 years
• Redemption: £100 at maturity
• Current yield required on similar maturity and credit-risk bonds: about 4.20%
• Dealer screen: clean price of 107.80, with accrued interest quoted separately

What is the single best explanation for the bond trading above par?

• A. Its fixed coupon is higher than the current required yield for comparable bonds, so investors bid up the price to reduce the yield to market levels.
• B. Its accrued interest has been added to the £100 par value, causing the quoted clean price to exceed par.
• C. Its non-callable status means it must always trade at a premium when interest rates move.
• D. Its redemption value must have increased above £100 because market yields have fallen.

Best answer: A

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: A fixed-rate bond’s price adjusts so that its cash flows offer a yield in line with the current market yield for similar maturity and credit risk. Here, the bond pays a 5.75% coupon while comparable bonds yield about 4.20%. That coupon stream is relatively attractive, so investors are willing to pay more than £100 to receive it. Paying a premium brings the investor’s effective yield down towards the current market level. The clean price excludes accrued interest, so the premium is not explained by interest earned since the last coupon date. The redemption amount also remains £100 unless the bond terms state otherwise.

• Accrued interest affects the dirty price paid at settlement, but the quoted clean price already excludes it.
• A fall in yields does not change the contractual redemption value of a conventional bond.
• Non-callable status may affect valuation, but it does not make a bond automatically trade above par.

A fixed-coupon bond trades above par when its coupon is more attractive than the yield now required for similar risk and maturity.

Question 6

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A UK fixed-income analyst is reviewing a sterling corporate bond held in an income portfolio.

Market extract:

Issuer and trading notes:

• Northshore has increased leverage to fund an acquisition.
• The bond issue is relatively small and dealer quotes have become less frequent.
• There has been no missed coupon payment.

What is the most defensible interpretation of the change in the yield spread?

• A. The wider spread means the bond has lower maturity risk than the comparable gilt.
• B. The bond is certain to default because its spread is wider than it was six months ago.
• C. The change is mainly explained by a general rise in risk-free interest rates.
• D. Investors are requiring a larger premium for credit and liquidity risk relative to the gilt benchmark.

Best answer: D

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: A yield spread compares the yield on a bond with a reference yield, usually a government bond of similar maturity. Because both yields include the broad level of interest rates, a widening spread points to factors specific to the non-government bond or its market segment. In this case, the gilt yield rose by only 10 bp, but the corporate bond yield rose by 70 bp, so the spread widened by 60 bp. The issuer’s higher leverage and reduced trading liquidity support the interpretation that investors now demand more compensation for credit and liquidity risk. A wider spread signals higher perceived risk or weaker market conditions; it does not, by itself, prove default or determine that the bond must be sold.

• A general rise in risk-free rates does not explain the spread widening, because the similar-maturity gilt yield barely changed.
• Default is too strong a conclusion; spreads can widen because of increased risk perception, liquidity pressure, or risk aversion without an actual default.
• Lower maturity risk is not implied; the comparison uses a similar-maturity gilt, so the key movement is the extra yield required over that benchmark.

The spread has widened by 60 bp while the gilt yield rose only 10 bp, consistent with increased compensation for issuer and liquidity risk.

Question 7

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

An analyst is updating the fixed-income register for a sterling portfolio. The portfolio can hold senior secured corporate bonds but cannot hold bank capital instruments or securities with equity conversion features.

Extract from final terms:

Issuer: Northport Utilities plc
Currency and nominal amount: £ sterling, £1,000 nominal
Issue date: 15 July 2026
Maturity date: 15 July 2036
Coupon: 4.25% fixed, payable semi-annually
Redemption: at par on maturity; issuer call at par from 15 July 2031
Status: direct, unconditional, unsubordinated obligations
Security: first fixed charge over specified regulated-network assets
Conversion or exchange rights: none

Which classification is most accurate?

• A. A floating-rate supranational eurobond with no fixed maturity and redemption only at the investor’s option.
• B. A sterling-denominated unsecured subordinated bank capital bond with a fixed coupon and mandatory conversion at maturity.
• C. A sterling-denominated senior secured corporate bond with a fixed semi-annual coupon, 10-year legal maturity, par redemption, and issuer call from 2031.
• D. An unsecured utility bond with bullet-only redemption, no early redemption provision, and ranking behind senior creditors.

Best answer: C

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: Bond characteristics are read from the legal and economic terms rather than from current market conditions. The issuer is Northport Utilities plc, so the instrument is a corporate bond, not a bank or supranational issue. It is denominated in sterling and pays a 4.25% fixed coupon semi-annually. The stated maturity date gives a 10-year legal maturity from issue. Redemption is at par on maturity, but the issuer also has a call right at par from 2031, so it is not purely bullet-only. The status wording shows senior, unsubordinated ranking, and the first fixed charge over specified assets makes it secured. The absence of conversion or exchange rights means it is not a convertible instrument.

• Bank capital and mandatory conversion are not supported by the issuer, status, or conversion-rights wording.
• A floating-rate, perpetual, investor-puttable supranational eurobond misstates the issuer, coupon, maturity, and redemption terms.
• Bullet-only unsecured treatment ignores both the issuer call and the first fixed charge securing the obligations.

The terms identify a corporate issuer, sterling currency, fixed coupon, 2036 maturity, par redemption with an issuer call, unsubordinated ranking, and first-charge security.

Question 8

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A wealth manager is comparing two sterling fixed-income income figures for a UK client.

Facts:

• The client pays 40% tax on taxable bond interest.
• Ignore accrued interest, dealing costs, allowances, and compounding.
• A taxable corporate bond pays a £5 annual coupon and is priced at £100.
• A tax-free fixed-income holding is expected to leave the client with a 3.6% yield after tax.

Which statement gives the single best interpretation of the yield figures?

• A. The corporate bond has a 3.0% gross yield and a 5.0% net yield; the 3.6% tax-free yield has a 2.16% grossed-up equivalent yield.
• B. The corporate bond’s 5.0% gross yield should be compared directly with the 3.6% tax-free net yield because both are fixed-income yields.
• C. The corporate bond has a 5.0% gross yield and a 3.0% net yield; the 3.6% tax-free yield has a 5.04% grossed-up equivalent yield.
• D. The corporate bond has a 5.0% gross yield and a 3.0% net yield; the 3.6% tax-free yield has a 6.0% grossed-up equivalent yield.

Best answer: D

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: Gross yield is the yield before tax. Here, the corporate bond pays £5 on a £100 price, so the gross yield is 5.0%. Net yield is what remains after tax: 5.0% × 60% = 3.0% for a 40% taxpayer. A grossed-up equivalent yield works in the other direction. It asks what pre-tax taxable yield would be needed to leave the same after-tax return. A 3.6% tax-free yield is therefore divided by 60%, giving 6.0%. This lets a tax-free or post-tax yield be compared with a taxable bond yield quoted on a gross basis.

• Multiplying a tax-free yield by 1.40 gives 5.04%, but grossing up requires division by the after-tax retention rate.
• Reversing gross and net yield is incorrect because gross is before tax and net is after tax.
• Comparing gross taxable yield directly with net tax-free yield mixes two different bases and can mislead the investment comparison.

The taxable bond yield is reduced by 40% tax, while a tax-free net yield is grossed up by dividing by 60%.

Question 9

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A bond dealer wants to finance a gilt position for two weeks using a repo. The repo desk provides the following terms:

• Collateral delivered at the start: UK conventional gilt
• Gilt market value at start: £25,000,000
• Haircut: 2%
• Repo term: 14 days
• Repo rate: 5.00% per annum, simple interest on actual/365
• At maturity, the dealer repurchases the gilt and pays the repo interest with the cash leg.

Which statement correctly interprets the repo cash flows and collateral effect?

• A. The dealer pays £24,500,000 initially and receives about £24,546,986 at maturity; the repo is unsecured because legal title to the gilt transfers.
• B. The dealer receives £24,500,000 initially and pays £24,500,000 at maturity; the repo rate is compensation to the dealer for providing collateral.
• C. The dealer receives £24,500,000 initially and pays about £24,546,986 at maturity; the 2% haircut reduces the cash advanced against the gilt collateral.
• D. The dealer receives £25,000,000 initially and pays about £25,047,945 at maturity; the haircut is applied only if there is a default.

Best answer: C

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: In a repo, the party seeking cash sells securities at the start and agrees to repurchase them later. The economic substance is secured financing: the securities act as collateral for the cash lender, and the haircut means less cash is advanced than the collateral’s market value. Here, the initial cash is £25,000,000 × 98% = £24,500,000. Repo interest is £24,500,000 × 5.00% × 14/365 = £46,986, so the repurchase cash is about £24,546,986. Settlement matters because the opening transfer of gilts and cash, and the closing return of gilts and repurchase cash, are central to funding and fixed-income inventory management.

• Using £25,000,000 as the opening cash ignores the 2% haircut applied to the collateral value.
• Treating the maturity payment as £24,500,000 ignores the repo interest owed by the cash borrower.
• Reversing the cash and gilt flows misstates the dealer’s role as the party raising cash against gilt collateral.

The cash raised is 98% of the gilt value, and repo interest is charged on that cash amount for 14 days.

Question 10

Topic: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

A wealth manager is preparing a short note on the sterling gilt curve after a stronger-than-expected inflation release.

Market facts:

• The central bank says further near-term tightening may be needed.
• Its growth forecast has been revised lower.
• The sterling zero-coupon spot curve is now:

• The implied one-year forward rate starting in one year is 4.5%.

Which interpretation is most appropriate?

• A. The one-year forward rate starting in one year is the same as the current yield on a two-year coupon gilt.
• B. The curve is inverted; the forward rate is a break-even future one-year rate implied by today’s spot curve, consistent with tight near-term policy and lower future short rates.
• C. The lower 10-year spot rate means long-dated gilts must have fallen in price after the inflation shock.
• D. The curve is steeply upward sloping; longer maturities now offer higher compensation for inflation and maturity risk.

Best answer: B

What this tests: Bond Markets, Bond Valuation, Yields, Term Structure, and Fixed-Income Risk

Explanation: Spot rates are zero-coupon rates for cash flows at particular maturities. Here, the one-year spot rate is higher than both the two-year and 10-year spot rates, so the curve is inverted rather than upward sloping. A one-year forward rate starting in one year is inferred from the one-year and two-year spot rates; it is the break-even rate for that future one-year period under today’s curve, not the running yield on a coupon bond. Because the forward rate of 4.5% is below the current one-year spot rate of 5.1%, the curve is consistent with markets pricing high near-term rates but lower future short rates, possibly because tighter policy is expected to weaken growth and inflation later.

• Calling the curve upward sloping ignores that spot rates fall from one year to 10 years.
• Treating the forward rate as a two-year coupon yield confuses an implied future zero-coupon rate with a current bond yield measure.
• A lower 10-year spot rate would generally support, not reduce, the price of a comparable long-dated fixed-rate gilt.

The spot curve slopes downward and the forward rate below the current one-year spot rate points to lower implied future short rates after near-term tightening.

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