CFA Fixed Income Study Tips for Level 1, 2 and 3

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The CFA fixed income section is a crucial part of your journey towards Chartered Financial Analyst — how can one become a CFA without mastering such an important asset class?

Because of this, the coverage of Fixed income is quite comprehensive throughout the exam. It represents 10% in Level 1, 10-20% in Level 2 and 10-20% again in Level 3.

Fixed Income Syllabus for Level 1

Specifically, on the two readings, SS15 is manageable but SS16 is quite a beast, so be prepared for that. In terms of topics, bootstrapping and forward rates are among the biggest and toughest. Duration and convexity are also big but not as bad. Swaps could take time to understand as well.

Basic concepts (study session 15)

  • Fixed-income securities: defining elements
  • Fixed- Income markets: issuance, trading, and funding
  • Introduction to fixed-income valuation
  • Introduction to asset-backed securities

Analysis of risks (study session 16)

  • Understanding fixed-income risk and return
  • Fundamentals of credit analysis

CFA Fixed Income Study Strategy for Level 1

It is a relatively easy section for fixed income professionals. For those who don’t have the background, some of the topics can make you pull your hair out. In this case I suggest that you allocate at least 3 weeks to go over the fixed income session very thoroughly, because this will not only make your life much easier in L1, but save you lots of time in L2 and L3.

In this level, the vast majority of questions are theoretical. You will need to do some computation on the options part.

Strategies beyond Level 1

The first strategy is to master the L1 materials in Level 1. If you get away with this without much studying, they will come back to haunt you in L2 and L3. Might as well bite the bullet.

Some of the terms you must to know include Convexity, Spot Rates, Forward Rates, Effective Duration, Callable Bonds, Option Embedded Bonds, Option-Adjusted Spread, Putable Bonds, Yield Spreads, and Yield Curve.

If you have taken L2 in 2014 or before, please note that the content in fixed income has been changed substantially in 2015, especially on the chapters on term structure and interest rates.

CFA Fixed Income Study Tips

1. Pound in the fundamental concept

In my opinion, if you understand duration, the rest of the fixed income material comes together pretty easily as it is based on the same concepts.

2. Check out other sources if you get stuck

None of the material is CFA exclusive. If it’s hard to figure things out from the text books, check out Youtube, Khan Academy and fixed income books. Look around and see what you can find.

3. Save sufficient time, energy and fresh mind for your FI study

Like many of the exam topics, you may want to allocate enough time to read certain chapters a few times. Once you do that, you’ll start to see the logic behind the call and put options and the OAS, Z and nominal spread etc.

I also suggest saving a quality studying time for your fixed income review. FI can be tricky and you want to learn with a fresh mind.

Review Materials

CFAI is a good study guide for fixed income. Elan is short and helpful if you have read the CFAI text or have some background in FI. This is especially helpful if you know the basics but don’t have time to cover the details. You can spend a week vs 3 weeks using Elan.

For Schweser, some of my readers don’t find the notes confusing and not helpful, but the videos are quite good.

Conclusion

Fixed income could look overwhelming, but the strategy is really the same: read the text, do practice questions, identify weaknesses and revise. Rinse and repeat. Good luck!

For Your Further Reading

You may consider these books as reference accruedint.blogspot.comzzi

  • Fixed Income Analysis by Fabozzi
  • Fixed Income Securities by Bruce Tuckman

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