CFA^® Level I Fixed Income Tips

By: Kaplan Schweser

August 15, 2024

Having a firm understanding of Fixed Income is essential for those preparing for the CFA Level I exam as bonds are a highly popular investment. To excel in this subject area, CFA candidates need to acquaint themselves with fundamental principles and calculations.

TABLE OF CONTENTS

Fixed Income Securities: Defining Elements
Fixed Income Markets: Issuance, Trading, and Funding
Introduction to Fixed Income Valuation
Introduction to Asset-Backed Securities
Understanding Fixed Income Risk and Return
Fundamentals of Credit Analysis

How To Study for CFA Level I Fixed Income Topic

It is easy to get bogged down by the calculations in Fixed Income, and while these are important, as demonstrated above there are many other components to this topic. A good strategy to use for gaining a firm grasp of Fixed Income is to complete the first two readings before you look at the calculations within ‘Introduction to Fixed Income Valuation’ and ‘Understanding Fixed Income Risk and Return’.

After covering the reading using the SchweserNotes and Module Videos, get into practice questions as early as possible so you can understand more about how this topic area is tested.

CFA Level I 6-Month Study Plan

What is a Learning Outcome Statement (LOS) for the CFA Exam?

Learning Outcome Statements while studying for a CFA exam refer to specific skills and concepts you should possess within an exam topic whereas exam topics describe the broader body of knowledge you should have. For example, the Fixed Income exam topic at Level I has a few LOSs that you’ll need to learn.

An example of a CFA LOS for Fixed Income is “describe basic features of a fixed-income security

Why CFA Candidates Need To Learn Fixed Income

Investing in fixed income such as bonds is one of the largest investment types in most markets, making it crucial as a CFA candidate to understand:

the characteristics of different fixed income investments
how the markets operate
how to value current or potential fixed income interests in order to make suitable investment decisions

Also understanding how movements in interest rates impact the value of bonds (ie. analyzing and calculating their duration) is a common technique to familiarize yourself with.

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How Much of the CFA Exam Tests Fixed Income?

The Fixed Income topic represents 11%-14% of the Level I exam, which is approximately 19-25 questions. This topic is tested in the afternoon session, within the Assets Functional Area, alongside Equity Investments, Derivatives, and Alternative Investments.

Is the CFA Level I Fixed Income Topic Hard?

It can take some time to understand the differences in rates such as the spot rates, forward rates and yields to maturity so ensure you focus on understanding the terminology in the first two readings before delving into the calculations.

While it is common to get bogged down in the numbers across Fixed Income (and the whole of CFA Level I to a certain extent) remember that these will only form a small portion of the questions on exam day. Pay attention to the LOSs to understand what your aim is in each section.

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When Should CFA Level I Candidates Study Fixed Income?

Fixed Income is a standalone topic, so can be studied at any point. Some candidates like to study this alongside the topics it is tested with on exam day (Equity Investments, Derivatives and Alternative Investments) to be able to understand the differences (and similarities) between the different assets. Make sure you study this after Quantitative Methods as the Time Value of Money techniques will be needed here.

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2024 CFA Level I Fixed Income Topic Readings

Below are overviews of each Level I Fixed Income reading and what you are expected to learn.

Fixed Income Securities: Defining Elements

This short reading introduces the key types of fixed income you will come across in the syllabus. Bonds are the most common type, where typically investors lend a firm or institution money, in exchange for a series of interest payments (coupons) and a repayment of the principal amount at maturity.

Key terminology is covered in this reading which will be used throughout the topic, as well as a brief look at covenants and other characteristics such as contingency provisions.

Fixed Income Markets: Issuance, Trading, and Funding

Just as you have equity markets, there are many fixed income (or debt) markets globally where investors can trade in fixed income securities. This reading covers the different types of issuers, how debt securities can be structured and issued, and why interest rates vary. It is easy to get bogged down in the calculations which follow in later readings, but these first two readings are crucial to your understanding of the topic.

Introduction to Fixed Income Valuation

The Time Value of Money principles learned in Quantitative Methods return here and are the basis of Fixed Income Valuation. We look at the pattern of cashflows from the Fixed Income security, and discount back to present value to find the price today.

Added considerations are which discount rate to use (e.g. yield to maturity, spot rates or forward rates), and the constant yield price trajectory. While the calculations are examinable, understanding the (inverse) relationship between interest rates and bond prices is just as important.

Introduction to Asset-Backed Securities

Fixed income securities which have the backing of specific assets or groups of assets are known as Asset-Backed Securities (ABS). This reading discusses the benefits of these as well as key characteristics and legal considerations. Residential mortgage-backed securities is the most detailed part of this reading, although other ABSs are introduced.

Understanding Fixed Income Risk and Return

The risk vs return payoff in this reading focuses on changes in interest rates for fixed income investors. ‘Duration’ is a term that you may have heard before which is used to assess how price risk and reinvestment risk affect the value of a bond. This reading focuses on the definition of duration, the different types, when they should be used and how to calculate or interpret a given duration.

Fundamentals of Credit Analysis

This reading focuses on credit analysis for corporate bonds, alongside a brief consideration of sovereign and non-sovereign government bonds. It discusses the 4 C's of credit, as well as the use of credit ratings and interpreting financial ratios to assist decisions.

What are the 4 C’s of Credit?

Capacity
Collateral
Covenants
Character

Review Fixed Income Concepts with Free Flashcards

Calculator Basics for the CFA Level I Exam

For the Fixed Income CFA topic, the TI BAII Plus calculator has some really helpful functions:

Time Value of Money buttons (N, I/Y) etc which have been covered in Quantitative Methods and elsewhere);
Calculating duration (2nd 9); and
Pricing bonds with accrued interest (2nd 9).

CFA Level I Exam Practice Questions

Answer these 5 questions to test your readiness for the Level I Exam.

Is the Fixed Income Topic the Same for CFA Level I and Level II?

Fixed Income is a similar portion of the Level I exam as the Level II exam. In Level II you’ll look in further detail at valuing bonds with embedded options, as well as building on other areas briefly mentioned at Level I such as Credit Default Swaps.

What Are the Best Books for Studying Fixed Income Securities?

Start off by reading the Schweser CFA Level I SchweserNotes for Fixed Income, which also provides illustrative examples and Module Quizzes for you to test your understanding. Once you have covered the material, you should cover as many other questions as possible from our range of resources such as the Schweser CFA Level I QBank.

Ready To Start Preparing For Fixed Income?

Looking for more guidance on how to prepare for Fixed Income? Enroll in one of our CFA Level I Premium study packages to receive expert instruction, CFA Program study materials, and more. Give yourself the best chance to prepare, practice, and perform on the CFA exam.