Yield and Yield Spread Measures for Fixed-Rate Bonds

First Principles Thinking: classification rule

B is correct. The defining criterion is whether the statement matches the CFA Curriculum description of true yield. Item I qualifies because true yield adjusts for weekends and holidays. Item II also qualifies because the curriculum states true yield is never higher than street convention yield due to delayed payment. Item III does not qualify because street convention, not true yield, is the commonly used market convention. Therefore, two items qualify.

Why option B is incorrect.

Why option C is incorrect. All three do not qualify because Item III contradicts the curriculum's statement that true yield is not commonly used in practice.

The G-spread is USD 3.756\% - 2.10\% = 1.656\%$. Converting to basis points gives USD 1.656 \times 100 = 165.6$ bps. Option A misses one decimal place. Option C fails to convert percent to basis points correctly.

The CFA Curriculum example converts 3.582% with periodicity 2 to about 3.556% with periodicity 12. Option B ignores the conversion. Option A incorrectly raises the quoted annual rate.

First Principles Thinking: classification rule

B is correct. The defining criterion is whether the item is a macroeconomic benchmark-rate component in the CFA Curriculum decomposition of yield. Expected inflation rate and expected real rate are benchmark components. Liquidity risk is a spread component because it is issuer- or security-specific. Therefore, two items qualify.

Why option B is incorrect.

Why option C is incorrect. All three do not qualify because liquidity belongs to the spread, not the benchmark, side of the decomposition.

The periodicity conversion in the CFA Curriculum gives a slightly more negative stated annual rate when compounding becomes more frequent. So the semiannual equivalent is about -0.729%. Option B is not the equivalent rate. Option C incorrectly halves the annual rate.

First restate the corporate yield: USD 3.20\% \times 365/360 = 3.2444\%$. Then subtract the government yield: USD 3.2444\% - 2.30\% = 0.9444\% = 94.4$ bps. Option A skips the day-count adjustment. Option C overstates the spread.

G-spread equals bond yield minus government benchmark yield, expressed in basis points. Here, USD 1.271\% - 1.100\% = 0.171\% = 17.1$ bps. Option B forgets that 0.171% is not 1.71%. Option C is off by a factor of 10.

Current yield is annual coupon divided by flat price. Here, USD 2.5/98.70 = 0.02533$, or about 2.53%. Option A understates the yield. Option C confuses current yield with a different yield measure.

First Principles Thinking: classification rule

B is correct. The defining criterion is whether the statement matches the CFA Curriculum description of current yield. Item I qualifies because current yield equals annual coupon divided by flat price. Item II qualifies because the curriculum explicitly calls current yield a crude measure that ignores coupon frequency, interest on interest, and accrued interest. Item III does not qualify because simple yield, not current yield, is used mostly to quote Japanese government bonds. Therefore, two items qualify.

Why option B is incorrect.

Why option C is incorrect. All three do not qualify because Item III belongs to simple yield, not current yield.

Government equivalent yield is approximated by multiplying the 30/360 yield by $365/360$. Thus, USD 3.20\% \times 365/360 = 3.244\%$, about 3.24%. Option B ignores the day-count restatement. Option A moves in the wrong direction.

Simple yield includes coupon plus straight-line amortized gain or loss, divided by flat price. Here the loss reduces the numerator: $(4 - 1)/100 = 0.03$, or 3%. Option A adds instead of subtracting the loss. Option B ignores the amortized loss.

First Principles Thinking: classification rule

C is correct. The defining criterion is whether each spread measure is matched to the correct curriculum definition. Item I matches the G-spread definition. Item II matches the I-spread definition. Item III matches the Z-spread definition as a constant spread over the benchmark spot curve. Therefore, all three items qualify.

Why option B is incorrect.

Why option C is incorrect.

The yields must be on the same periodicity before taking the spread. Using the semiannual equivalent, USD 1.267\% - 1.10\% = 0.167\% = 16.7$ bps. Option B incorrectly uses 1.271% without periodicity adjustment. Option C miscomputes the difference.

Using the periodicity conversion rule from the CFA Curriculum, a 3.582% yield with periodicity 2 converts to about 3.566% with periodicity 4. Option B ignores the compounding conversion. Option C moves in the wrong direction because more frequent compounding corresponds to a lower annualized stated rate.

First Principles Thinking: classification rule

C is correct. The defining criterion is whether the statement matches the CFA Curriculum description of an on-the-run government bond. Item I qualifies because on-the-run means most recently issued. Item II qualifies because these bonds typically trade at slightly lower yields than similar off-the-run bonds. Item III qualifies because the on-the-run coupon is closest to the current market discount rate, so the bond tends to trade near par. Therefore, all three items qualify.

Why option B is incorrect.

Why option C is incorrect.

Simple yield equals coupon payments plus the straight-line amortized share of gain or loss, divided by flat price. So $(2 + 1)/100 = 0.03$, or 3%. Option A ignores the amortized gain. Option C ignores most of the coupon income.

First Principles Thinking: classification rule

A is correct. The defining criterion is whether the statement matches the CFA Curriculum definition of simple yield. Item I matches exactly: simple yield equals coupon payments plus the straight-line amortized share of gain or loss, divided by flat price. Item II describes street convention yield, and Item III describes government equivalent yield. Therefore, only one item qualifies.

Why option B is incorrect. Two items do not qualify because only Item I is the simple yield definition; Items II and III belong to different yield conventions.

Why option C is incorrect. All three cannot qualify because the curriculum clearly separates simple yield from street convention yield and government equivalent yield.

For periodicity 4, the stated annual yield is the rate per quarter times 4. So USD 0.8\% \times 4 = 3.2\%$. Option A is the per-quarter rate only. Option C overstates the annualized rate.

A semiannual bond basis yield equals the yield per semiannual period times 2. Here, USD 1.5\% \times 2 = 3.0\%$. Option B uses only one period. Option C doubles twice.

Current yield equals annual coupon divided by flat price. So USD 3.2/98.7 = 0.03242$, or about 3.24%. Option B is just the coupon rate. Option C uses the wrong direction for the price effect.

First Principles Thinking: classification rule

C is correct. The defining criterion is whether the statement matches the periodicity rules stated in the CFA Curriculum. Item I qualifies because annualized yield depends on the assumed number of interest periods in the year. Item II qualifies because periodicity typically matches coupon frequency. Item III qualifies because the curriculum states that more frequent compounding at a lower annual rate can be equivalent to less frequent compounding at a higher rate. Therefore, all three items qualify.

Why option B is incorrect.

Why option C is incorrect.

First Principles Thinking: classification rule

C is correct. The defining criterion is whether the statement matches the CFA Curriculum treatment of yield-to-worst. Item I qualifies because yield-to-worst is the lowest of the yields-to-call and yield-to-maturity. Item II qualifies because the curriculum says its intent is to provide the most conservative return measure. Item III qualifies because it is a commonly cited measure for fixed-rate callable bonds. Therefore, all three items qualify.

Why option B is incorrect.

Why option C is incorrect.

First Principles Thinking: classification rule

B is correct. The defining criterion is whether the statement matches the CFA Curriculum description of government equivalent yield. Item I qualifies because this yield measure restates 30/360 to actual/actual. Item II also qualifies because the curriculum says it is used to obtain the spread over the government YTM. Item III does not qualify because current yield is a different measure based on annual coupon divided by flat price. Therefore, two items qualify.

Why option B is incorrect.

Why option C is incorrect. All three cannot qualify because Item III confuses government equivalent yield with current yield, which the curriculum defines separately.