# Level 1 CFA® Exam Fixed Income Relations

soleadea

8 months 3 weeks 3 days

*This blog post was created as a part of the CFA exam review series to help you in your level 1 exam revision, whether done regularly or shortly before your CFA exam.*

In this post, we cover the most important relations between variables from the Fixed Income level 1 CFA exam topic.

## Inverse Relationship

between Interest Rate and Bond PriceLet’s begin with some basics, namely the relationship between the market discount rate and the bond price.

Generally, there is an inverse relationship between interest rates and the price of a bond.

If:

interest rates go up the price of a bond goes down,

interest rates go down the price of the bond goes up.

If:

the required yield changes only a bit (it either increases or decreases a bit) the absolute value of the percentage change in the bond price will be approximately the same for both increase and decrease of the market discount rate

the required yield changes a lot the absolute value of the percentage change in the bond price will be lower if the market discount rate increases than if the discount rate decreases

## Coupon Rate vs YTM

coupon rate > YTM the bond sells at a premium (the bond price is higher than the par value)

coupon rate = YTM the bond sells at par (the bond price is equal to the par value)

coupon rate the bond sells at a discount (the bond price is lower than the par value)

coupons’ reinvestment rate investment's realized rate of return

coupons’ reinvestment rate > YTM investment's realized rate of return > YTM

## Callable Bond vs Putable Bond

value of the callable bond = value of the bond without an embedded option - value of the call option

value of the putable bond = value of the bond without an embedded option + value of the put option

volatility of the market discount rate increases __call option__ value increases __callable bond__ value decreases

volatility of the market discount rate increases __put option__ value increases __putable bond__ value increases

## Spot Curve vs Forward Curve

__spot curve__ is upward sloping __forward curve__ is above the spot curve

__spot curve__ is downward sloping __forward curve__ is under the spot curve

## Reinvestment Risk vs Market Price Risk

the lower the coupon rate the lower the reinvestment risk

the lower the coupon rate the higher the market price risk

## Bond's Price Change (Duration Only)

the greater the modified duration the greater the percentage bond price change

the lower the modified duration the lower the percentage bond price change

the greater the yield change (yield volatility) the greater the percentage bond price change

the lower the yield change (yield volatility) the lower the percentage bond price change

LAST UPDATE: 2 Nov 2023