Fixed income instruments offer a broad spectrum of utility, serving investors and issuers with purposes ranging from income generation and safeguarding of principal to intricate asset-liability management. Notably, the credit risk assessment associated with fixed-income securities has gained profound significance since the aftermath of the global financial crisis 2008.
| Fixed Income | ||
|---|---|---|
| Topic Weight | Number of Questions | |
| Level 1 | 11-14% | 20-25 |
| Level 2 | 10-15% | Ca. 11 |
The Fixed Income segment of the curriculum is known for its quantitative nature, and it ranks among the more challenging areas covered in the CFA exam. Its prominence is sustained throughout all 3 levels, making it a pivotal component of the CFA program. Within this subject matter, you are introduced to an extensive array of financial concepts and formulas that are indispensable for proficient financial analysis, whether within the purview of fixed income or in broader financial contexts.
What to Expect in CFA Level 1 Fixed Income
On the CFA Institute’s Level 1 exam, Fixed Income is among the top 3 most heavily weighted topics, along with Financial Statement Analysis and Ethics.
You are taught to define fixed income securities and calculate and interpret their associated features. The material covers securitization, the fundamentals of credit risk, and the influence of interest rates on bond returns
Exam Weighting
The CFA Fixed Income topic has a weight of 11-14% of the total exam content, so that approximately 20-25 of the 180 CFA Level 1 exam questions focus on this topic.
| No. of Learning Modules | No. of Formulas |
|---|---|
| 19 | ca. 40 |
Level 1 Fixed Income 2026 Syllabus, Readings, and Changes
TheCFA Level 1 curriculum has about 19 readings for Fixed Income (8.2% of the total curriculum).
| No. of Learning Modules – 19 | No. of LOS – 51 | |
|---|---|---|
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Summary
The learning modules introduce attributes of various Fixed Income securities and how to calculate and interpret bond prices, yields, and spreads, and then also introduces securitization and provides an overview of global debt markets. The material covers fundamentals of bond returns and risks with special attention given to interest rates and credit risk. It also introduces key factors for assessing bond sensitivity and credit analysis.
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Fixed-Income Instrument Features
The focus of the topic is on understanding fixed-income instruments, encompassing the description of their features. Additionally, you are expected to delve into the contents of a bond indenture, emphasizing the ability to contrast affirmative and negative covenants.
Fixed Income Markets: Issuance and Trading
Global Fixed Income markets include publicly traded securities and non-publicly traded loans. These markets typically attract less attention despite being 3 times larger than global equity markets.
The learning module presents a summary of global fixed income markets and their major players. You will be introduced to fixed income indexes and fixed income trading in secondary markets.
Fixed-Income Cash Flows and Types
This topic focuses on comprehending fixed-income cash flows and types. This involves describing the common cash flow structures of fixed-income instruments and contrasting cash flow contingency provisions that benefit issuers and investors. Additionally, you are expected to articulate how legal, regulatory, and tax considerations impact the issuance and trading of fixed-income securities.
Fixed-Income Markets for Corporate Issuers
Many kinds of assets generate cash flows for their investors, such as mortgages, auto loans, student loans, bank loans, etc. When those cash flows are securitized, they pass through an entity that repackages them as fixed income securities, and their cash flows become the basis of that asset’s value. Special entities issue these securities as asset-backed securities (ABS).
You will be introduced to the benefits of securitization for investors, issuers, economies, and financial markets. The learning module also explores the various characteristics of different ABS types and their associated risks.
Fixed-Income Markets for Government Issuers
The focus of this topic is on understanding funding choices made by sovereign and non-sovereign governments, quasi-government entities, and supranational agencies. You are expected to describe these funding choices. The topic also involves contrasting the issuance and trading of government and corporate fixed-income instruments.
Yield and Yield Spread Measures: Fixed Rate Bonds and Floating Rate Instruments
The focus of this section is on the ability to calculate the annual yield on a bond for varying compounding periods within a year. Additionally, you are expected to compare, calculate, and interpret yield and yield spread measures for fixed-rate bonds. Similarly, in the context of yield and yield spread measures for floating-rate instruments, the emphasis is on the capability to calculate and interpret yield spread measures for such instruments and calculate and interpret yield measures specifically tailored for money market instruments.
Fixed-Income Risk and Credit Analysis (An Overview)
This section covers essential concepts in fixed-income risk and credit analysis:
| Yield-Based Bond Measures |
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| Yield-Based Bond Convexity and Portfolio |
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| Curve-Based and Empirical Risk Measures |
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| Credit Risk |
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| Credit Analysis for Government and Corporate Issuers |
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| Fixed-Income Securitization |
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CFA Fixed Income Level 1 Sample Questions and Answers
These sample questions are typical of the probing multiple-choice questions on the CFA L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA curriculum. UWorld’s question bank is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.
An analyst has gathered the following information on zero-coupon government bond yields:
| Maturity | Spot Rate |
|---|---|
| 1 year | 2.42% |
| 2 years | 3.05% |
| 3 years | 3.48% |
| 4 years | 3.65% |
If the rates are based on a periodicity of 1, the one-year forward rate 2 years in the future (2y1y) is closest to:
- 3.72%
- 4.16%
- 4.35%
A two-year floating-rate note pays three-month Libor plus 15 basis points. The floater is priced at 99.60 per 100 par value, three-month Libor is currently 1.45%, and the coupon reset today. Assuming a 30/360 day-count convention and quarterly coupon payments, the discount margin in basis points (bps) is closest to:
- 35 bps
- 40 bps
- 45 bps
A coupon bond’s Macaulay duration is most accurately described as the holding period over which:
- the value of cash flows received equal the cost of buying the bond.
- changes in reinvestment income offset changes in the bond’s price.
- the bond earns a risk-free return if hedged by shorting a government bond.
What to Expect in CFA Level 2 Fixed Income
The CFA Level 2 Fixed Income is one of the most heavily weighted topics on the exam. The material introduces traditional and modern theories regarding the shape of the yield curve and the fundamental relationships underpinning its composition. You will study valuation methods used to value bonds with embedded options and various credit analysis concepts.
Exam Weight
The CFA Fixed Income topic has a weight of 10-15% of the total exam content, so that approximately 8-12 questions or 2-3 item sets on the CFA Level 2 exam focus on this topic.
| No. of Readings | No. of Formulas |
|---|---|
| 5 | ca. 60 |
Level 2 Fixed Income Syllabus, Readings, and Changes
The CFA Level 2 curriculum includes 5 learning modules for the Fixed Income topic (10% of the total curriculum). There have been only minor updates to the L2 Fixed Income curriculum.
| No. of Learning Modules – 5 | No. of LOS – 50 | |
|---|---|---|
Summary These learning modules focus on the following categories of Alternative Investments: real estate, private equity, and commodities. The Fixed Income curriculum introduces the yield curve and fundamental aspects of its composition. You will learn various theories regarding yield curve shape and an arbitrage-free framework for valuing option-free bonds. It then builds on binomial valuation methods to value bonds with embedded options. You will study credit analysis, the term structure of credit spreads, and how credit default swaps are used in managing credit exposure. | ||
The Term Structure and Interest Rate Dynamics
Interest rates act to influence and measure the economy. Quantifying interest rate risk is an important skill for risk managers, and understanding the determinants of interest rates is important for issuers of and investors in fixed-income securities.
The learning module explains spot rates and forward rates and their influence on the yield curve shape. You will build on this information to understand how forward rates influence the yield-to-maturity and expected bond returns.
The Arbitrage-Free Valuation Framework
Valuing fixed income securities, derivatives, and other financial assets is predicated on the idea that market prices adjust until arbitrage opportunities expire
The learning module introduces concepts and techniques for no-arbitrage valuation of Fixed Income securities. This includes discussions of the binomial interest rate tree and a Monte Carlo forward-rate simulation.
Valuation and Analysis of Bonds with Embedded Options
The value of embedded options is typically contingent on interest rates. This makes bond valuation more complex when a bond has one or more embedded options. Bond issuers and investors must understand how various embedded options influence bond values and their sensitivity to interest rate changes.
The learning module introduces a summary of different types of embedded options before exploring bonds that include a call or put provision. You will also learn about how option-adjusted spreads are used to value risky callable and putable bonds.
Credit Analysis Models
Credit analysis models rely on inputs such as exposure to default loss, the loss given default, and the probability of default. These models are an important part of valuing corporate and government bonds.
You are introduced to structural and reduced-form credit analysis models. The learning module also covers the arbitrage-free framework and compares the credit analysis for securitized debt with that of corporate bonds.
Credit Default Swaps
A credit default swap is a financial contract between 2 parties that enables an investor to “swap” or offset credit risk with another investor for a defined period of time. These derivative instruments are broadly used internationally.
The learning module classifies these instruments and explores their fundamental concepts. You will learn about the elements associated with their valuation, pricing, and applications.
CFA Fixed Income Level 2 Sample Questions and Answers
These sample questions are typical of the L2 exam’s complexity and depth – formatted as item sets, with a vignette to deliver a scenario that tests the CFA L2 curriculum. On the actual exam, each vignette applies to 4 questions. We’ve added a few additional questions for you to practice with. Be sure to review the illustrated explanations we’ve provided for each question. UWorld’s question bank is designed to expose you to exam-like questions and explain the concepts tested thoroughly.
Which of the three approaches for the arbitrage-free valuation of option-free bonds described by Muon is least likely correct?
- Approach 1
- Approach 2
- Approach 3
Based on Exhibits 1 and 2, which bond has a market price that best reflects its arbitrage-free price?
- Bond A
- Bond B
- Bond C
Based on Exhibit 3, if Muon assumes a volatility of 20%, the interest rate at the higher-rate node at Time 1 is closest to:
- 1.40%
- 1.72%
- 3.13%
What to Expect in CFA Level 3 Fixed Income?
Fixed Income is no longer a stand-alone topic at Level 3, but it is heavily integrated into Portfolio Management. Bond valuation concepts, yield curve dynamics, interest rate risk, and liability-driven investing all reappear inside PM and Wealth Management readings.
Frequently Asked Questions (FAQs)
Is CFA Level 1 Fixed Income hard?
CFA Level 1 Fixed Income is considered 1 of the more difficult topics on the exam. For most students, it is also 1 of the least familiar. Fixed-income securities are typically more abstract than equity investments. It’s likely you are more familiar with the stock exchange and equity investments than you are with debt securities.
The earning modules are highly theoretical and laden with novel terms. You are introduced to several bond valuation methods and complicated concepts related to risk and return analysis. However, having a solid understanding of Fixed Income is critical to the CFA charter.
Is the CFA Level 2 Fixed Income topic hard?
Like its Level 1 counterpart, the CFA Level 2 Fixed Income is considered 1 of the more difficult topics on the exam. Fixed income is relatively heavy on formulas and theory. You will study various formulae used to value bonds with embedded options and the theoretical and practical aspects of the yield curve.
What topics are included in the CFA Fixed Income syllabus?
The Fixed Income syllabus includes bond features and types, pricing and yield measures, interest rate risk, duration and convexity, credit risk, securitization, the term structure of interest rates, yield curve dynamics, and, at Level 2, valuation of bonds with embedded options, credit analysis, structured products, and multi-factor interest rate models.
How many Fixed Income questions appear on the CFA exam?
Fixed Income typically represents 10–12% of the Level 1 exam, which is roughly 18–22 questions, and about 10–15% of the Level 2 exam, which corresponds to one to three item sets depending on the exam cycle.
What is the difference between Fixed Income in Level 1 and Level 2?
Level 1 focuses on bond basics, pricing, yields, duration, convexity, and introductory risk concepts, while Level 2 expands into advanced valuation techniques, yield curve modeling, credit analysis, structured securities, and bonds with embedded options, requiring deeper interpretation and more quantitative analysis.
Does Fixed Income appear as a stand-alone topic in CFA Level 3?
Fixed Income does not appear as a stand-alone topic at Level 3, but its concepts including interest rate expectations, bond portfolio strategies, credit exposures, and duration management are heavily integrated into the Portfolio Management and Wealth Management curriculum.
Which Fixed Income topics are considered the hardest?
The most challenging topics include valuation of bonds with embedded options, multi-factor interest rate models, credit risk modeling, mortgage-backed securities, securitization, and duration/convexity calculations due to their quantitative and conceptual complexity.
Is Fixed Income formula-heavy?
Yes. Fixed Income relies on numerous formulas for bond pricing, yield calculations, duration, convexity, spot rate extraction, forward rates, and option-adjusted spread analysis, making it one of the more mathematically intensive topics on the CFA exams.
What formulas are most important in CFA Fixed Income?
Key formulas include present value of bond cash flows, yield to maturity, spot and forward rate calculations, Macaulay and modified duration, convexity, effective duration for bonds with embedded options, and spread measures such as G-spread, I-spread, Z-spread, and option-adjusted spread (OAS).
How should I study Fixed Income for the CFA exam?
The best approach is to build a solid understanding of core pricing and yield concepts, practice duration and convexity problems, work through bond valuation examples, and use QBanks and mock exams to improve speed and accuracy, as Fixed Income questions often require multiple calculation steps.