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. 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 assetliability 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 is Fixed Income in CFA?
Fixed Income refers to investment securities created by borrowing; they are leases, loans, or bonds that provide interest and/or principal repayments to investors for a specified time (until the security matures), at which point investors recoup their principal. Issuers are typically governments, institutions, or corporations seeking to raise funds. Financial analysts must assess the risks and rewards of fixed income securities for both issuers and investors.
What is 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, and its weight increases through each level of the exam.
Candidates are taught to define fixed income securities and calculate and interpret their associated attributes. The material covers securitization, the fundamentals of credit risk, and the influence of interest rates on bond returns.
Exam Weight
The CFA Fixed Income topic has a weight of 10%12% of the total exam content, so that approximately 1821 of the 180 CFA Level 1 exam questions focus on this topic.
Topic Weight  No. of Readings  No. of Formulas  No. of Questions 

1012%  6  ca. 40  ca. 20 
Syllabus, Readings and Changes Overview
The weight of the Fixed Income section increased from 2018 to 2019. Since 2021, the weight has fluctuated between 1012% of the total exam content.
2018  2019  2020  2021  2022 

10%  11%  11%  1012%  1012% 
Topline Changes in Fixed Income Level I:
Fixed Income  #Readings 

# of unchanged Readings  0 
# of Updated Readings  0 
# of Revised Readings  6 
# of New Extensively Revised or Added Readings  0 
For the 2022 curriculum, every reading in the Fixed Income module was changed. Each of the six readings had some new material added to it after being edited to remove repetition and overlap. Additionally, consistency was added to all notations. No new material has been added; rather, the quality and clarity of the already published information has been improved.
Fixed Income Level 1 Changes  

FixedIncome Securities: Defining Elements  Revision 
FixedIncome Markets: Issuance, Trading, and Funding  Revision 
Introduction to FixedIncome Valuation  Revision 
Introduction to AssetBacked Securities  Revision 
Understanding FixedIncome Risk and Return  Revision 
Fundamentals of Credit Analysis  Revision 
The syllabus is divided into the following two study sessions:
Study Session  No. of Readings  No. of LOS 

13  4  37 
Summary Introduces attributes of various Fixed Income securities and how to calculate and interpret bond prices, yields, and spreads. Also introduces securitization and provides an overview of global debt markets.  
14  2  23 
Summary Covers fundamentals of bond returns and risks with special attention given to interest rates and credit risk. Also introduces key factors for assessing bond sensitivity and credit analysis. 
The CFA Level 1 curriculum includes 60 readings for 2022, with 6 of these readings (3944) on Fixed Income (10% of the total curriculum).
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 nonpublicly traded loans. These markets typically attract less attention despite being three times larger than global equity markets.
 The reading presents a summary of global fixed income markets and their major players.
 Candidates will be introduced to fixed income indexes and how fixed income securities are traded 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 reading covers the necessary concepts and techniques for valuing fixedrate bonds, floatingrate 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 AssetBacked 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 assetbacked securities (ABS).
 Candidates will be introduced to the benefits of securitization for investors, issuers, economies, and financial markets.
 The reading 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 fixedrate bond returns, duration and convexity, the price value of basis point (PVBP), and various types of risks.
 The reading 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 reading introduces the core concepts of credit risks (e.g., default probability, loss severity) and creditrelated 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 multiplechoice questions on the 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 examlike questions and illustrate and explain the concepts tested thoroughly.
An analyst has gathered the following information on zerocoupon 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 oneyear forward rate 2 years in the future (2y1y) is closest to:
 3.72%
 4.16%
 4.35%
A forward rate (or implied forward rate [IFR]) is a future period interest rate. Forward rates are not expectations of future spot rates; instead, they are future interest rates that reflect the difference between spot rates of different maturities (ie, tenors), based on the assumption that investment strategies covering the same time horizon and carrying equivalent risk should have the same return. In effect, forward rates are the breakeven reinvestment rates that produce that result. Arbitragefree pricing enforces the consistency of forward rates with spot rate differences.
In this scenario, equal amounts invested in a strategy today should have the same future value at the end of 3 years. To answer this question, two investment strategies can be compared as follows:
 Buy a threeyear zerocoupon bond and hold it to maturity (ie, right side of the first equation above).
 Buy a twoyear zerocoupon bond and hold it to maturity; at maturity, reinvest the proceeds in a oneyear zerocoupon bond (ie, left side of the first equation above).
These two strategies are illustrated on the following timeline:
The IFR for the oneyear forward rate starting 2 years in the future (IFR_{2,3−2}) is calculated as follows:
(Choice A) 3.72% results from incorrectly calculating the IFR as [(1 + Threeyear spot rate)^{3} − 1] / 2.
(Choice B) 4.16% is the oneyear forward rate starting 3 years in the future.
Things to remember:
A forward rate is a future period interest rate that reflects the difference between spot rates of different tenors. In effect, forward rates are breakeven reinvestment rates that result in two investment strategies of equivalent risk, covering the same time horizon and earning the same return.
A twoyear floatingrate note pays threemonth Libor plus 15 basis points. The floater is priced at 99.60 per 100 par value, threemonth Libor is currently 1.45%, and the coupon reset today. Assuming a 30/360 daycount convention and quarterly coupon payments, the discount margin in basis points (bps) is closest to:
 35 bps
 40 bps
 45 bps
A floatingrate note (FRN) is a debt instrument with an interest rate that resets periodically, so that the interest rate and payments are “floating” and not fixed. The interest rate is based on a reference rate, such as LIBOR, plus a quoted margin, which compensates the investor for the credit risk of the issuer.
The price of an FRN is its discounted future payments, where the discount factor is based on the reference rate plus a discount margin. The discount margin represents the market’s required spread to price the FRN at par on the reset date.
To solve for the discount margin, first calculate the discount factor and then use that to derive the discount margin.
 Calculate the discount factor (using a financial calculator):

Use the discount factor to find the discount margin:
(Choice B) 40 bps is the difference between the market price and par value, not the discount margin.
(Choice C) 45 bps is the periodic discount factor, not the discount margin. The periodic discount factor equals the sum of the reference rate and the discount margin (180 bps) divided by the number of periods per year (4).
Things to remember:
A floatingrate note (FRN) is a debt instrument with an interest rate that resets periodically and is based on a reference rate, such as LIBOR, plus a quoted margin. The price of an FRN is its discounted future payments, where the discount factor is based on the reference rate plus a discount margin that reflects the market’s required return.
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 riskfree return if hedged by shorting a government bond.
Noncallable coupon bonds contain two types of interest rate risk: reinvestment risk and price risk. Reinvestment risk dominates in the long run and price risk dominates in the short run. Logically, somewhere in between the short run and the long run, there should be a balance point. That point is the Macaulay duration: the holding period to the point where changes in reinvestment income and changes in price offset one another exactly.
 Interest rates increase: additional reinvestment income and bond price decreases
 Interest rates decrease: reduced reinvestment income and bond price increases
No matter the direction, the impact of a rate change is positive for one source of return, but negative for the other. In the short run, price risk dominates. Interest rate changes affect bond prices immediately. In the long run, reinvestment risk dominates since its impact builds over time as more coupons are reinvested. A bond’s Macaulay duration is the holding period over which those risks balance each other.
(Choice A) Market price equals the present value of the coupon and principal, so a bond must be held to maturity to receive cash flows with a value equal to the cost of the bond. Since Macaulay duration is the present value weighted average time of the cash flows, a coupon bond’s Macaulay duration is shorter than its time to maturity.
(Choice C) Although it is a type of hedge, the strategy is not riskless and therefore does not lock in a riskfree rate of return.
Things to remember:
The Macaulay duration is the holding period of a bond to the point where changes in reinvestment income and changes in price offset one another exactly.
SimpleSheets are your easy access to Level 1 formulas!
FAQs
Is CFA Level 1 Fixed Income Hard?
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 readings 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.
How Can I Study L1 Fixed Income for CFA Exam?
Focus on the Foundational Concept – Once you comprehend bond valuation and duration, the rest of the fixed income content will make a lot more sense because it is founded on the same ideas.
Set aside enough time, energy, and a clear head for your FI Studies – You might wish to set aside enough time to read some chapters more than once, similar to many exam topics you will encounter. Often, the second time through, the reading is the charm. Want to learn more? Check out our Level 1 Study Guide.
What is 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. Candidates 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 1012 of the 88 CFA Level 2 exam questions focus on this topic.
Topic Weight  No. of Readings  No. of Formulas  No. of Questions 

1015%  5  ca. 60  ca. 11 
Syllabus, Readings and Changes Overview
The weight of the Fixed Income exam section has remained at a consistent 1015% since 2019.
2018  2019  2020  2021  2022 

1020%  1015%  1015%  1015%  1015% 
Topline Changes in Fixed Income Level 2:
Fixed Income  #Readings 

# of unchanged Readings  0 
# of Updated Readings  0 
# of Revised Readings  5 
# of New Extensively Revised or Added Readings  0 
All five of the Level II Fixed Income readings for the 2022 CFA Program have received minor revision.
Notably, a new part in the “Term Structure and Interest Rate Dynamics” reading covers the factors that influence bond risk premiums and how these factors affect yield curve movements, laying the groundwork for deciding how to place fixed income portfolios. The reading demonstrates how analysts can form an opinion on benchmark rates, spreads, and yield curve movements using important economic data. To enhance the accuracy and readability of the previously published material, the other four readings in the Fixed Income topic area were updated.
Fixed Income Level 2 Changes  

The Term Structure and Interest Rate Dynamics  Revised 
The ArbitrageFree Valuation Framework  Revised 
Valuation and Analysis of Bonds with Embedded Options  Revised 
Credit Analysis Models  Revised 
Credit Default Swaps  Revised 
The syllabus is divided into the following two study sessions:
Study Session  No. of Readings  No. of LOS 

11  2  20 
Summary Introduces the yield curve and fundamental aspects of its composition. Candidates will learn various theories regarding yield curve shape and an arbitragefree framework for valuing optionfree bonds.  
12  3  30 
Summary Builds on binomial valuation method to value bonds with embedded options. Candidates will study credit analysis, the term structure of credit spreads, and how credit default swaps are used in managing credit exposure. 
The CFA Institute Level 2 curriculum includes 47 total readings for 2022, with five of these readings (2832) centered on Fixed Income (12.7% of the total curriculum).
The Term Structure and Interest Rate Dynamics
Interest rates act to both 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 reading explains spot rates and forward rates and their influence on the yield curve shape.
 Candidates will build on this information to understand how forward rates influence the yieldtomaturity and expected bond returns.
The ArbitrageFree 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 reading introduces concepts and techniques for noarbitrage valuation of Fixed Income securities.
 This includes discussions of the binomial interest rate tree and a Monte Carlo forwardrate 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 reading introduces a summary of different types of embedded options before exploring bonds that include a call or put provision.
 Candidates will also learn about how optionadjusted 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.
 Candidates are introduced to structural and reducedform credit analysis models.
 The reading also covers the arbitragefree 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 two 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 reading classifies these instruments and explores the fundamental concepts behind them.
 Candidates will learn about the elements associated with their valuation, pricing, and applications.
CFA Fixed Income Level 2 Sample Questions and Answers
The sample questions here 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 four questions; we’ve thrown in a couple extra to get a bit more learning in). And be sure to review the illustrated explanations we’ve provided for each question: UWorld’s question bank is designed to expose you to examlike questions and explain the concepts tested thoroughly.
Passage
Macon Quark manages a proprietary trading desk at a multinational financial institution. Quark directs Jemma Muon, CFA, an analyst at the firm, to evaluate the US market for profitable trading opportunities. Muon collects the US par bond rates shown in Exhibit 1:
Exhibit 1 US Benchmark Par Curve Bonds  

Maturity (years)  YTM 
1  1.50% 
2  2.00% 
3  2.50% 
During a discussion of bond valuation in the current market environment, Muon describes the following approaches to the arbitragefree valuation of a coupon bond:
Approach 1: Value the bond as a portfolio of zerocoupon bonds that replicate the bond’s cash flows.
Approach 2: Value the bond as the sum of the individual cash flows’ present values, discounting each cash flow by the spot rate with a matching term.
Approach 3: Value the bond as the sum of the individual cash flows’ present values, discounting each cash flow by the YTM of a benchmark bond with the same time to maturity as the bond.
After the discussion, Muon is directed to evaluate several 3year bonds, shown in Exhibit 2:
Exhibit 2 Summary Data for US 3Year Bonds  

Coupon Rate  Market Price  
Bond A  2.50%  100.251 
Bond B  3.00%  101.737 
Bond C  3.50%  102.847 
Quark had begun developing binomial interest rate trees for both the Swiss and eurozone fixedincome markets, based on equal probabilities of rates being higher or lower in future periods. Quark instructs Muon to complete these interest rate trees (Exhibits 3 and 4):
Once the trees are completed, Quark uses the eurozone binomial tree to calculate the arbitragefree value of a 3year, 6% coupon, optionfree bond. Afterward, Quark and Muon discuss the implications of using different volatility assumptions and the pathwise valuation of bonds using the binomial interest rate trees.
Assume that all bonds pay coupons annually and that all interest rates are annual compound rates.
Which of the three approaches for the arbitragefree valuation of optionfree bonds described by Muon is least likely correct?
 Approach 1
 Approach 2
 Approach 3
Approach 1: Value the bond as a portfolio of zerocoupon bonds that replicate the bond’s cash flows.
Approach 2: Value the bond as the sum of the individual cash flows’ present values, discounting each cash flow by the spot rate with a matching term.
Approach 3: Value the bond as the sum of the individual cash flows’ present values, discounting each cash flow by the YTM of a benchmark bond with the same time to maturity as the bond.
Arbitragefree valuation of optionfree bonds is based on the noarbitrage principle: market prices adjust until there is no possibility of making riskfree profits through the simultaneous purchase and sale of related assets. This principle is based on two related, fundamental concepts.
 The law of one price: Assets that are perfect substitutes (eg, same asset traded in different markets, an asset and its related forward contract) must trade at equivalent values.
 Value additivity: The value of the whole must equal the sum of the value of its parts.
The arbitragefree pricing of a coupon bond reflects these concepts by discounting individual cash flows by the spot rate with a term that matches the bond’s payment dates (Choice B). This approach values the bond as a portfolio of zerocoupon bonds that replicate the amount and timing of the bond’s coupons and principal (Choice A). As a result, each discount rate incorporates any risks captured in market term premiums.
Discounting a coupon bond’s cash flows by a single rate (as suggested in Approach 3) is inappropriate for estimating the bond’s arbitragefree value—unless the yield curve is flat, which is clearly not the case in this instance (Exhibits 1 and 2). If the single discount rate were the bond’s YTM, the result would be the bond’s market price, which could never reveal an arbitrage opportunity. In addition, a single rate would not reflect any difference in risk (eg, expected inflation) from the variation of interest rates across maturities.
Things to remember:
The arbitragefree valuation of optionfree bonds is based on value additivity and the law of one price. These two concepts are applied to a coupon bond by discounting the bond’s individual cash flows by the appropriateterm spot rate. This treats the bond as a portfolio of zerocoupon bonds that match the amount and timing of the bond’s coupons and principal.
Based on Exhibits 1 and 2, which bond has a market price that best reflects its arbitragefree price?
 Bond A
 Bond B
 Bond C
Exhibit 1 US Benchmark Par Curve Bonds  

Maturity (years)  YTM 
1  1.50% 
2  2.00% 
3  2.50% 
Exhibit 2 Summary Data for US 3Year Bonds  

Coupon rate  Market price  
Bond A  2.50%  100.251 
Bond B  3.00%  101.737 
Bond C  3.50%  102.847 
P_{0} =
P_{0} = Arbitragefree price
PMT = Periodic coupon
r ( J ) = J – period spot rate
The arbitragefree value of a coupon bond is the sum of the present value of the bond’s cash flows discounted by the appropriateterm spot rates. Violations of the noarbitrage principle are uncovered by comparing a bond’s arbitragefree value, based on a spot rate curve, to the bond’s market price, based on a single discount rate (ie, the bond’s YTM).
1 =
PBC_{N} = Par bond coupon for bond with N years to maturity
r ( J ) = J – period spot rate
N = Number of periods to maturity
Spot rates are bootstrapped from a benchmark (eg, government bond) par yield curve. Bootstrapping is an iterative process that extends a spot rate curve one period at a time. Each iteration uses a par bond with a maturity equal to the term of the spot rate being calculated.
A par bond has a price of 1.00 (ie, 100% of par) and a coupon rate equal to its YTM. Each cash flow before maturity is discounted by the (previously calculated) appropriateterm spot rate. The cash flows are known, as are all spot rates except the one for the final period. Using the bootstrapping equation from above, solve for the finalperiod discount rate, which is the spot rate for a term matching the bond’s maturity.
The 1year spot rate is equal to the 1year par rate: 1.50%.
The 2year spot rate is calculated by rearranging the equation as follows:
The 3year spot rate is calculated as follows:
Use the spot rates bootstrapped from the par bond rates to calculate the arbitragefree values of the bonds. However, note that Bond A requires no calculation: since the bond has a coupon rate equal to the 3year par bond YTM, it has an arbitragefree value equal to 100% of par.
Arbitragefree value  Market price  

Bond A 
2.5
/
(1.015)^{ 1}
+
2.5
/
(1.02005) ^{2}
+
102.5
/
(1.02517) ^{3}
= 100.000

100.251 
Bond B 
3.0
/
(1.015)^{ 1}
+
3.0
/
(1.02005) ^{2}
+
103.0
/
(1.02517) ^{3}
= 101.437

101.737 
Bond C 
3.5
/
(1.015)^{ 1}
+
3.5
/
(1.02005) ^{2}
+
103.5
/
(1.02517) ^{3}
= 102.874

102.847 
Things to remember:
The arbitragefree value of a coupon bond is the sum of the present value of the bond’s cash flows discounted by the appropriateterm spot rates. The spot rates for an arbitragefree valuation can be bootstrapped from a par bond curve.
Based on Exhibit 3, if Muon assumes a volatility of 20%, the interest rate at the higherrate node at Time 1 is closest to:
 1.40%
 1.72%
 3.13%
Binomial interest rate trees are based on a benchmark yield curve. For all periods beyond Time 0, the tree consists of 1period forward rates, which are calculated through a trialanderror process using:
 a benchmark bond maturing one period beyond the previously obtained rates,
 an assumed volatility that is the same for the entire tree,
 the benchmark yield curve 1period spot rate, and
 1period forward rates obtained from all previous iterations of this process.
Binomial rate tree construction requires assumptions about how interest rates change. The standard approach is to assume interest rate changes are lognormally distributed. This assumption leads to the relationship between the rates at adjacent nodes at a given period of time, as shown in this tree. To calculate the 1period higher forward rate, use the 1period lower forward rate (i_{1,L}) and the given volatility (20%).
i_{1,H}  = i_{1,L }× e^{2}^{σ} 
= 0.0115 × e^{2(0.2)}  
= 0.0115 × 1.492  
= 1.72% 
Note: The “lower” rate one period in the future is not necessarily below the interest rate at the previous node; it is lower relative to the “higher” rate for that period. Depending on the slope of the benchmark spot rate curve, the “lower” rate at the next period could be either above or below the interest rate at the preceding node.
(Choice A) 1.40% results from multiplying i_{1,L} by e^{2}, which fails to reflect that the exponent is 2 times the volatility.
(Choice C) 3.13% results from multiplying i_{1,L} by e, which is incorrect since e must be raised to the power of 2 times the volatility.
Things to remember:
Rates on a binomial interest rate tree are calculated through a trialanderror process, using benchmark bonds and an assumed volatility. For two adjacent nodes at a given time period, the higher rate is derived from the lower interest rate and the assumed volatility.
FAQs
Is the CFA Level 2 Fixed Income topic hard?
Like its Level 1 counterpart, the CFA Level 2 Fixed Income is considered one of the more difficult topics on the exam. Fixed income is relatively heavy on both formulas and theory. Candidates will study various formulae used to value bonds with embedded options and the theoretical and practical aspects of the yield curve.
What is CFA Level 3 Fixed Income topic?
The CFA Level 3 Fixed–Income topic is the second most heavily weighted topic on the exam, with a weight of 1520%. In contrast, Portfolio Management has a weight of 3540%. The two study sessions discuss the role played by fixed income securities in portfolios and introduce fixed income mandates before revisiting the yield curve and its association with fixed income portfolios.
Exam Weight
The CFA Fixed Income topic has a weight of 15%20% of the total exam content, meaning that approximately 48 of the 44 CFA Level 3 multiple choice exam questions focus on this topic.
Topic Weight  No. of Readings  No. of Formulas  No. of Questions 

1520%  4  –  ca. 6 (multiple choice) 
Syllabus, Readings and Changes Overview
The weight of the Fixed Income topic has remained consistent since 2018.
2018  2019  2020  2021  2022 

1015%  1520%  1520%  1520%  1520% 
Topline Changes in Fixed Income Level 3:
FixedIncome Portfolio Management  #Readings 

# of unchanged Readings  0 
# of Updated Readings  0 
# of Revised Readings  2 
# of New Extensively Revised or Added Readings  2 
The “Overview of FixedIncome Portfolio Management” and the “LiabilityDriven and IndexBased Strategies” readings in the FixedIncome Portfolio Management topic area were revised for clarity and accuracy.
FixedIncome Portfolio Management Changes  

Overview of FixedIncome Portfolio Management  Revised 
LiabilityDriven and IndexBased Strategies  Revised 
Yield Curve Strategies  Major Revision 
FixedIncome Active Management: Credit Strategies  Major Revision 
The syllabus is divided into the following two study sessions:
Study Session  No. of Readings  No. of LOS 

5  2  15 
Summary Discusses the role of fixed income securities in portfolios and introduces liabilitybased and total return mandates. Candidates will learn about fixed income portfolio risk measures and alternatives to direct bond investments. The session concludes with liabilitydriven and indexbased strategies.  
6  2  18 
Summary Covers credit strategies for Fixed Income portfolios and provides a deeper understanding of the yield curve. Candidates will also learn portfolio management strategies used to develop and manage Fixed Income credit portfolios. 
The CFA Level 3 curriculum includes 35 total readings for 2022., with 4 (11.4%) of these readings on Fixed Income (readings 1114).
Overview of Fixed Income Portfolio Management
Fixed income instruments run the gamut from publicly traded securities to nonpublicly traded instruments. Investors use these instruments to generate regular income from their investments until their capital is returned at a predetermined date.
 The reading discussed the various roles of fixed income securities in portfolios, fixed income mandates, and bond market liquidity.
 Candidates will also cover portfolio measures, instruments, and vehicles used in fixed income portfolio management.
LiabilityDriven and IndexBased Strategies
Passive fixed income investment strategies go beyond buy and hold strategies. Bond portfolios can be routinely rebalanced using strategies like immunization and indexation. The reading covers such strategies alongside strategies for liabilitydriven investing.
 Candidates will learn how to develop and structure fixed income portfolios with assets and liabilities in mind.
Yield Curve Strategies
Active fixed income management involves deviating from the primary risk factors associated with an index. To generate excess returns, analysts must assess the yield curve and develop a portfolio with interest rates in mind.
 The reading primarily covers fixed income yield curve management strategies to exceed the returns of a benchmark index due to yield curve changes.
Fixed Income Active Management: Credit Strategies
The reading emphasizes credit spreads and how to quantify the effect of spread changes on portfolio value. Candidates will review other expected fixed income return components and learn about credit spread measures for fixed and floatingrate bonds.
FAQs
Is the CFA Level 3 Fixed Income topic hard?
The CFA Level 3 Fixed Income topic is considered one of the more difficult topics on the exam. It is the second most heavily weighted topic for Level 3. Fixedincome continues to be heavy on both formulae and theory throughout the CFA curriculum. However, candidates who have built a solid foundation in Fixed Income for Levels 1 and 2 should have an easier time.
How Can I Study Level 3 Fixed Income for the CFA exam?
To get the best of both worlds, think about combining the CFA curriculum with a thirdparty prep provider, like UWorld. The End of Chapter (EOC) questions from the CFA Institute are comprehensive, and thirdparty study resources are condensed and timeefficient.
For constructed response sessions, you need to practice a lot, ideally in an exam setting. Improve your ability to selfgrade 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.
CFA Fixed Income Study Tips for L1, L2, and L3
If you are a fixed income professional, this section might come easy for you. On the other hand, if you are not, 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. Not only will this make your life much simpler in L1, but it will also help you save time in L2 and L3. 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.
Visit our CFA Level 1 Study Guide and CFA Level 2 Study Guide for more information.