Fixed Income accounts for 10-12% of your CFA Level I exam, but it causes a disproportionate number of failures. The reason qualified candidates fail isn't complex calculus; it's misinterpreting a single bond feature, like a call option, and calculating a yield that looks right but is fundamentally wrong. Mastering the judgment call of which yield or price to use is the difference between passing and failing this section.
To pass CFA Level I Fixed Income, you must master bond valuation (full vs. clean price), risk measurement (duration and convexity), and yield calculations, especially the concept of yield to worst (YTW) for bonds with embedded options. The exam prioritizes applying these frameworks correctly over simple formula memorization.
Key facts
- Topic Weighting
- 10-12% of the CFA Level I exam.
- Key Concepts
- Bond Valuation, Yield Measures (YTM, YTC, YTW), Duration, Convexity, Credit Risk.
- Common Traps
- Confusing clean vs. full price, ignoring embedded options, misapplying duration.
- Official Body
- CFA Institute.
- Recommended Study
- ~35-40 hours of focused study within the 300+ hour total for Level I.
- VoraPrep Practice
- Access over 2,500 CFA Level I questions, including hundreds for Fixed Income.
The CFA Institute reports that the Level I pass rate was 37% for the most recent testing window (CFA Institute), underscoring the need for precision in high-weight topics like Fixed Income.
What Are the Most-Tested Fixed Income Concepts?
The Fixed Income curriculum is broad, but the exam consistently focuses on a few core areas where candidates are most likely to make mistakes. Your study plan should prioritize these concepts.
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Bond Types and Features
You must be able to differentiate between major bond types, as their features dictate how you value them and assess their risk. Expect to see questions involving:- Government and Agency Bonds: Sovereign debt (e.g., U.S. Treasuries) and quasi-government debt.
- Corporate Bonds: Issued by companies, featuring various covenant structures and credit risk levels.
- Zero-Coupon Bonds: Pay no coupons and are issued at a deep discount to par value. Their only cash flow is the face value at maturity.
- Floating-Rate Notes (FRNs): Coupon payments reset periodically based on a reference rate (like SOFR).
- Bonds with Embedded Options: Callable bonds (issuer can redeem early) and putable bonds (investor can sell back early) are heavily tested.
Yield Curve Theories
The yield curve shows the relationship between interest rates and time to maturity. You need to understand the three main theories explaining its shape:- Pure Expectations Theory: Forward rates are solely a function of expected future short-term rates. An upward-sloping curve means the market expects rates to rise.
- Liquidity Preference Theory: Investors demand a liquidity premium for holding longer-term bonds. This implies the yield curve will typically slope upward even if rates are expected to be flat.
- Market Segmentation Theory: The supply and demand for bonds within different maturity ranges determine yields. A bank seeking short-term assets and a pension fund seeking long-term assets operate in different segments.
What Are the Must-Know Fixed Income Formulas?
These formulas are the engine of Fixed Income analysis. While your financial calculator is a critical tool, you must understand the components of each formula to select the right inputs. Try VoraPrep's free CFA practice questions to drill these calculations.
Bond Valuation (Price)
A bond's price is the present value of its future cash flows (coupons and principal), discounted at the market rate.-
r= Market discount rate per period -
n= Number of periods to each coupon payment -
N= Total number of periods to maturity
Modified Duration
Modified duration estimates the percentage price change of a bond for a 100 basis point (1%) change in its yield. It is the most practical measure of interest rate sensitivity on the exam.-
Macaulay Duration= Weighted-average time to receive cash flows (in years). -
YTM= Annual yield to maturity. -
k= Number of coupon payments per year.
Approximate Percentage Price Change
This formula provides a more accurate estimate of a bond's price change by incorporating convexity, which accounts for the curvature of the price-yield relationship.Calculate Your CFA Level 1 Score & Study Hours by Domain
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How Do You Calculate a Bond's Full Price vs. Clean Price?
This is one of the most common calculation traps on the Level I exam. The price you see quoted is almost never the price you actually pay.
The clean price is the quoted price of a bond, which excludes any accrued interest.
The full price (or dirty price) is what a buyer actually pays to acquire the bond. It is the clean price plus interest that has accrued since the last coupon payment date.
Step 1: Calculate Accrued Interest (AI)
Accrued interest is the proportional share of the next coupon payment that belongs to the seller.Step 2: Calculate the Full Price
Simply add the accrued interest to the clean price.What Are the Most Common Fixed Income Traps?
The examiner knows exactly where candidates get confused. These three traps are responsible for countless lost points.
Trap 1: Confusing YTM, YTC, and Yield to Worst (YTW)
This is the single biggest judgment trap in Fixed Income. Candidates calculate the yield to maturity (YTM) for a callable bond without considering the issuer's incentive to call it.The yield to worst (YTW) is the lowest possible yield an investor can receive on a callable bond without the issuer defaulting. You must calculate both the YTM and the yield to call (YTC) and identify the lower of the two.
| Yield Measure | When It's Relevant | The Exam Trap |
|---|---|---|
| YTM | For non-callable ("straight") bonds, or for callable bonds trading at a discount. | Applying it blindly to a callable bond trading at a premium. |
| YTC | For callable bonds trading at a premium, where rates have fallen below the coupon rate. | Ignoring it when a bond is likely to be called. |
| YTW | The correct yield to quote for any callable bond. It is the lower of YTM and YTC. | Calculating YTM and stopping, selecting a distractor answer. |
Trap 2: Ignoring Negative Convexity
While most bonds have positive convexity (good for investors), a callable bond can exhibit negative convexity.When interest rates fall significantly, the price of a straight bond continues to rise. However, the price of a callable bond is "capped" because the market knows the issuer will likely call the bond at the call price. This price compression means the bond's price appreciation slows down and can even fall as yields continue to drop. The exam will test this concept qualitatively.
Trap 3: The Semi-Annual Calculation Error
This is a mechanical error, but it's incredibly common under time pressure. When a bond pays semi-annual coupons:- N (Number of periods) must be years × 2.
- I/Y (Yield) must be the annual yield ÷ 2.
- PMT (Coupon payment) must be the annual coupon ÷ 2.
Forgetting even one of these adjustments will lead you directly to a wrong answer choice.
An analyst is evaluating a 7% annual coupon bond with a $1,000 face value and 5 years to maturity. The bond is callable in 3 years at $1,020. The bond is currently trading at $1,050. The yield to maturity (YTM) is 5.85%.
What is the bond's yield to worst (YTW)?
Step 1: Identify the trap. The bond is callable and trading at a premium ($1,050 > $1,000). This is a huge red flag. You cannot just accept the YTM of 5.85%. You MUST calculate the yield to call (YTC). Step 2: Calculate the Yield to Call (YTC). Use your financial calculator with the following inputs, solving for the yield:- N = 3 (The bond is callable in 3 years)
- PV = -1050 (The current price, entered as a negative)
- PMT = 70 (0.07 × $1,000 annual coupon)
- FV = 1020 (The call price, NOT the par value)
Solving for I/Y gives you a YTC of 5.39%.
Step 3: Determine the Yield to Worst (YTW). Compare the YTM and the YTC.- YTM = 5.85%
- YTC = 5.39%
The YTW is the lower of the two, which is 5.39%.
What Are the Best Mnemonics and Memory Aids?
Mnemonics are great for rules and relationships. For Fixed Income, focus on the drivers of interest rate risk.
A simple rule for duration is the "Double L" Rule:
- Longer maturity = Higher duration (more sensitive to rate changes).
- Lower coupon = Higher duration (more of the bond's value is tied to the final principal payment far in the future).
A bond with a 30-year maturity and a 2% coupon will have dramatically higher interest rate risk than a bond with a 5-year maturity and a 6% coupon. Use this to quickly eliminate answer choices in qualitative questions. For a deeper dive into the full curriculum, see this comprehensive breakdown of the full CFA Level I curriculum.
How to Use This Cheat Sheet in Your Study Routine
This guide is a tool for active recall and targeted practice, not passive reading.
First, use it as a final review before starting a block of practice questions from VoraPrep's adaptive CFA Level I question bank. A five-minute scan of the formulas and traps will prime your brain.
Second, after you complete a quiz, use this sheet to diagnose your errors. If you missed a question on a callable bond, come back to the YTW section. Did you fall for the trap? Re-read the logic and try another similar problem. VoraPrep's adaptive engine and detailed explanations will help you pinpoint these weak areas automatically.
Finally, turn the key concepts into flashcards. Don't just write the formula. Create a two-sided card: one side with "When is YTC more relevant than YTM?" and the other with "When a callable bond trades at a premium." This forces you to recall the application, which is what the exam tests.