I Pass the CFA Exam | Pass the CFA Exam & Other Finance Exams

You are here:
Home »
CFA Prep »
CFA Fixed Income Study Tips for Level 1, 2, and 3

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

By John / Stephanie

The CFA fixed income section is a crucial part of your journey toward becoming a 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. Regarding 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.

At 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 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 changed substantially a few years ago, especially in 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 textbooks, 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 quality studying time for your fixed income review. FI can be tricky, and you want to learn with a fresh mind.

CFA Exam 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 Kaplan Schweser, some of my readers don’t find the notes confusing and not helpful, but the videos are quite good. The I Pass website also has a complete comparison of the best CFA review courses.

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!