CFA® Fixed Income
Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)
The CFA Institute Fixed Income curriculum covers the largest capital market segment and asset class: fixed income securities, more familiarly known as bonds. These securities are the primary way that institutions, governments, and other entities raise capital around the world.
Fixed income instruments have a broad range of applications for both investors and issuers, including income generation, principal preservation, and asset-liability management. Furthermore, the evaluation of credit risk for fixed income securities has become particularly important for financial analysts in the wake of the global financial crisis of 2008.
The Fixed Income topic is heavily quantitative. It is considered one of the more difficult topics of the CFA exam and remains a heavily weighted topic throughout Levels 1, 2, and 3. The material introduces candidates to a broad range of financial concepts and formulae critical to financial analysis within and outside this topic area.
What to Expect in CFA Level 1 Fixed Income?
On the CFA Institute’s Level 1 exam, Fixed Income is among the top three most heavily weighted topics, along with Financial Statement Analysis and Ethics.
Candidates 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.
The CFA Fixed Income topic has a weight of 10%-12% of the total exam content, so that approximately 18-21 of the 180 CFA Level 1 exam questions focus on this topic.
|Topic Weight||No. of Learning Modules||No. of Formulas||No. of Questions|
|10-12%||6||ca. 40||ca. 20|
Level 1 Fixed Income 2023 Syllabus, Readings, and Changes
The CFA Level 1 curriculum includes 73 readings for 2023, with 6 on Fixed Income (8.2% of the total curriculum). For the 2023 curriculum, there are no changes to the Fixed Income learning modules (all were updated in 2022).
|No. of Learning Modules – 6||No. of LOS – 60|
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.
The weight of the Fixed Income section increased from 2018 to 2019. Since 2021, the weight has fluctuated between 10-12% of the total exam content.
Fixed Income Securities: Defining Elements
Fixed income securities allow organizations to borrow from investors in return for future interest payments and the return of principal. Based on total market value, these instruments are the most widespread means of raising capital around the world. For this reason, financial analysts with a comprehensive understanding of Fixed Income concepts will have an edge over their peers.
- Candidates will learn about the three important factors concerning fixed Income security investment: the bond’s features, considerations regarding contractual agreements between bondholder and issuer, and contingency provisions that might affect cash flows.
Fixed Income Markets: Issuance, Trading, and Funding
Global Fixed Income markets include both publicly traded securities and non-publicly traded loans. These markets typically attract less attention despite being three times larger than global equity markets.
- The learning module presents a summary of global fixed income markets and their major players.
- Candidates will be introduced to fixed income indexes and fixed income trading in secondary markets.
Introduction to Fixed Income Valuation
Pension funds, mutual funds, insurance companies, sovereign wealth funds, and retirees are all typical investors in fixed income securities. Proper valuation of these securities is critical for both the institutions and individuals who invest in them and the businesses and governments that rely on them for financing.
- The learning module covers the necessary concepts and techniques for valuing fixed-rate bonds, floating-rate notes, and money market instruments.
- Candidates will also learn to analyze yield curves and yield spreads as they relate to maturity and risk, respectively.
Introduction to Asset-Backed Securities
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).
- Candidates 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.
Understanding Fixed Income Risk and Return
The principles used to evaluate fixed income risk and returns extend to the many financial assets and liabilities that financial analysts will encounter throughout their careers. Specific topics include fixed-rate bond returns, duration and convexity, the price value of basis point (PVBP), and various types of risks.
- The learning module introduces bond duration and convexity as they relate to interest rate risk measures and credit and liquidity risks.
- Candidates will also learn to use statistical methods to establish empirical estimates using historical data.
Fundamentals of Credit Analysis
The debt market is critical to funding the operations of companies and governments and facilitating economic growth in general. This means that credit analysis is vital for capital allocation. Financial analysts must understand how to assess credit risk, and to price and reprice it as risk factors evolve.
- The learning module introduces the core concepts of credit risks (e.g., default probability, loss severity) and credit-related risks (e.g., liquidity risk, spread risk, credit migration risk).
- Candidates will also learn about the relationship between credit risk and the capital structure of the firm.
CFA Fixed Income Level 1 Sample Questions and Answers
The 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.
Study Tips for CFA Fixed Income
- If you are a fixed income professional, this section might come more easily for you, but don’t even think about skipping it. Fixed income is critical for every level of the CFA exams.
- On the other hand, if you are like most CFA candidates and are not a fixed income professional, this will be some of the least familiar, most quantitative, and most difficult material in the curriculum. The silver lining is that it is all quite logical and methodical. Plan to put in the time to thoroughly go over the Fixed Income readings.
- Level 3 is all about portfolio management, and fixed income instruments are critical to any well-diversified portfolio. The vast bulk of the problems at this level are theoretical. But, you'll also need to do some math.
- The best advice for both Level 2 and Level 3 is to review and refresh the material from the previous levels.
Frequently Asked Questions
CFA Level 1 Fixed Income is considered one of the more difficult topics on the exam, and for most candidates, it is also one of the least familiar. Fixed income securities are typically more abstract than equity investments. Furthermore, candidates are often more familiar with the stock exchange and equity investments than they are with debt securities.
The earning modules are highly theoretical and laden with novel terms. Candidates are introduced to several methods of bond valuation and complicated concepts related to risk and return analysis. However, having a solid understanding of Fixed Income is critical to the CFA charter.
To get the best of both worlds, think about combining the CFA curriculum with a third-party prep provider, like UWorld. The End of Chapter (EOC) questions from the CFA Institute are comprehensive, and third-party study resources are condensed and time-efficient.
For constructed response sessions, you need to practice a lot, ideally in an exam setting. Improve your ability to self-grade essay questions and become a master at responding to them. If you are running short on time, go over the questions and sample answers to complete your review prior to the test. Don’t overlook or undervalue the item set session. This is most likely going to increase your overall score.