CFA® Fixed Income
Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)
The CFA Institute Fixed Income curriculum delves into the vast and critical realm of fixed income securities, commonly referred to as bonds. These financial instruments serve as the cornerstone for raising capital across the globe, facilitating the financial needs of institutions, governments, and various other entities.
Fixed income instruments offer a broad spectrum of utility, serving both investors and issuers with purposes ranging from income generation and safeguarding of principal to intricate assetliability management. Notably, the assessment of credit risk associated with fixedincome securities has gained profound significance since the aftermath of the global financial crisis in 2008.
The Fixed Income segment of the curriculum is renowned for its quantitative nature, and it ranks among the more challenging areas covered in the CFA exam. Its prominence is sustained throughout all three levels, making it a pivotal component of the CFA program. Within this subject matter, candidates 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 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.
Exam Weighting
The CFA Fixed Income topic has a weight of 1114% of the total exam content, so that approximately 2025 of the 180 CFA Level 1 exam questions focus on this topic.
Topic Weight  No. of Learning Modules  No. of Formulas  No. of Questions 

1114%  19  ca. 40  2025 
Level 1 Fixed Income 2024 Syllabus, Readings, and Changes
The CFA 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  

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. 
FixedIncome Instrument Features
The focus of the topic is on understanding fixedincome instruments, encompassing the description of their features. Additionally, candidates 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 both publicly traded securities and nonpublicly 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.
FixedIncome Cash Flows and Types
this topic focuses on comprehending fixedincome cash flows and types. This involves describing the common cash flow structures of fixedincome instruments and contrasting cash flow contingency provisions that benefit both issuers and investors. Additionally, candidates are expected to articulate how legal, regulatory, and tax considerations impact the issuance and trading of fixedincome securities.
FixedIncome 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 assetbacked 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.
FixedIncome Markets for Government Issuers
The focus of this topic is on understanding funding choices made by sovereign and nonsovereign governments, quasigovernment entities, and supranational agencies. Candidates are expected to describe these funding choices. Furthermore, the topic involves contrasting the issuance and trading of government and corporate fixedincome 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, candidates are expected to compare, calculate, and interpret yield and yield spread measures for fixedrate bonds. Similarly, in the context of yield and yield spread measures for floatingrate 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.
FixedIncome Risk and Credit Analysis (An Overview)
This section covers essential concepts in fixedincome risk and credit analysis:
YieldBased Bond Measures 

YieldBased Bond Convexity and Portfolio 

CurveBased and Empirical Risk Measures 

Credit Risk 

Credit Analysis for Government and Corporate Issuers 

FixedIncome Securitization 

CFA Fixed Income Level 1 Sample Questions and Answers
The sample questions are typical of the probing multiplechoice 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 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.
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. 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 1015% of the total exam content, so that approximately 812 questions or 23 item sets on the CFA Level 2 exam focus on this topic.
Topic Weight  No. of Readings  No. of Formulas  No. of Questions 

1015%  5  ca. 60  ca. 11 
Level 2 Fixed Income Syllabus, Readings, and Changes
The CFA Level 2 curriculum includes 5 total learning modules for 2024, for the Fixed Income topic (10% of the total curriculum). There have been no changes to the L2 Fixed Income curriculum in 2024, except for minor updates.
No. of Learning Modules – 5  No. of LOS – 50  

Summary
The Fixed Income curriculum 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. It then builds on binomial valuation methods 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 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 learning module 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 learning module 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 learning module 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 learning module 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 learning module 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.
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.
What to Expect in CFA Level 3 Fixed Income?
The CFA Level 3 Fixed Income topic is the second most heavily weighted topic on the exam, with a weight of 1520%.
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 Weighting
The CFA Fixed Income Portfolio Management topic has a weight of 1520% of the total exam content,
meaning that approximately 2430 questions or 34 items sets and essay vignettes on the CFA Level 3 multiple choice exam questions focus on
this topic.
Level 3 Fixed Income Syllabus, Readings, and Changes
The CFA Level 3 curriculum for 2024 comprises four readings, reflecting an
increase of two readings compared to the 2023 curriculum.
No. of Readings  No. of LOS 

4  33 
Summary Discusses the role of fixed income securities in portfolios and introduces liabilitybased and 
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 buyandhold 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.
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 welldiversified 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.
Visit our CFA Level 1 Study Guide and CFA Level 2 Study Guide for more information.
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.
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.