CFA® Fixed Income
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 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 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.
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 Readings||No. of Formulas||No. of Questions|
|10-12%||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 10-12% of the total exam content.
Topline Changes in Fixed Income Level I:
|Topic Name||# of unchanged Readings||# of Updated Readings||# of Revised Readings||# of New Extensively Revised or Added Readings|
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|
|Fixed-Income Securities: Defining Elements||Revision|
|Fixed-Income Markets: Issuance, Trading, and Funding||Revision|
|Introduction to Fixed-Income Valuation||Revision|
|Introduction to Asset-Backed Securities||Revision|
|Understanding Fixed-Income 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||Summary|
|13||4||37||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||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 (39-44) 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 non-publicly 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 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 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 fixed-rate 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 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.
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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.