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CFA Level 1 Fixed Income: Complete Study Guide (2026)

The 19 modules divide naturally into four blocks: bond features and markets (LM 1–5), bond valuation and yields (LM 6–9), interest rate risk — duration and convexity (LM 10–13), and credit risk and securitization (LM 14–19). Each block builds on the previous one.

All 19 Learning Modules at a Glance

Block 1: Bond Features and Markets (LM 1–5)

LM 1: Fixed-Income Instrument Features

The foundation. A fixed-income security is a contractual obligation to make specified payments on specified dates. The curriculum covers the key features: issuer (governments, corporations, supranationals, SPVs), maturity (money market < 1 year; capital market ≥ 1 year), principal (par or face value — typically $1,000), coupon rate and frequency (annual, semi-annual, quarterly), and seniority (the hierarchy of claims in default).

Contingency provisions are embedded options that change the bond’s cash flows under certain conditions — callable bonds (issuer can redeem early), putable bonds (holder can sell back early), and convertible bonds (holder can exchange for equity). These provisions affect value: callable bonds are worth less than otherwise identical non-callable bonds (the issuer holds the option); putable bonds are worth more (the holder holds the option).

Yield measures and yield curves: This section introduces the basic concepts that get full treatment in LM 6–9. Bond indentures are the legal contracts governing the bond. Covenants are the specific terms — affirmative covenants (things the issuer must do: maintain insurance, pay taxes, provide financial statements) and negative covenants (things the issuer must not do: limit additional debt, restrict asset sales, cap dividend payments).

LM 2: Fixed-Income Cash Flows and Types

This module covers the variety of cash flow structures beyond plain vanilla:

Amortizing debt: Principal is repaid gradually alongside interest (mortgages, auto loans). The curriculum covers fully amortizing loans (principal fully repaid by maturity), partially amortizing loans (balloon payment at maturity), and the amortization schedule calculation. Variable-rate (floating-rate) debt: The coupon resets periodically based on a reference rate (like SOFR) plus a spread. The curriculum covers reset mechanics, caps and floors, and inverse floaters.

Zero-coupon bonds: No periodic interest; sold at a discount to par and redeemed at face value. The entire return comes from price appreciation. Deferred coupon structures: No coupon payments for an initial period, then regular coupons begin. The curriculum also covers legal, regulatory, and tax considerations — including the tax treatment of original issue discount (OID) bonds.

LM 3: Fixed-Income Issuance and Trading

How bonds are issued and traded. The curriculum covers fixed-income market segments (government, corporate, structured finance, municipal), major indexes, and the distinction between primary markets (new issuance through auctions, underwriting, private placement) and secondary markets (OTC dealer markets for most bonds — unlike equities, most fixed-income trading doesn’t happen on exchanges).

LM 4: Fixed-Income Markets for Corporate Issuers

Short-term funding: Bank loans, commercial paper, and repurchase agreements (repos). The curriculum covers repos in detail — how they work (sell a security with an agreement to repurchase), their role in money markets, the relationship between repo rate and collateral quality, and the risks (counterparty risk, collateral risk, rollover risk). Repos are particularly important because they’re the plumbing of short-term fixed-income markets.

Long-term corporate debt: Investment-grade vs. high-yield issuance. The curriculum covers the key differences: IG bonds have bullet structures (principal at maturity), lower coupons, fewer covenants, and are sold through bookbuilding. HY bonds often have call provisions (the issuer wants the option to refinance if their credit improves), higher coupons, stronger covenants, and may include payment-in-kind (PIK) features.

LM 5: Fixed-Income Markets for Government Issuers

Sovereign debt: T-bills (zero coupon, < 1 year), T-notes (2–10 years), T-bonds (> 10 years), and TIPS (inflation-indexed). The curriculum covers sovereign debt issuance through auctions (competitive and non-competitive bidding), benchmark issues (on-the-run vs. off-the-run), and international comparisons. Non-sovereign and quasi-government debt: Agencies (Fannie Mae, Freddie Mac), local/regional governments (municipal bonds), and supranational organizations (World Bank, European Investment Bank).

Block 2: Bond Valuation and Yields (LM 6–9)

LM 6: Bond Valuation — Prices and Yields

The quantitative core of fixed income. Bond pricing is a direct application of TVM: the price of a bond equals the present value of its future cash flows (coupons + principal) discounted at the market discount rate.

Yield-to-maturity (YTM) is the internal rate of return if the bond is held to maturity and all cash flows are reinvested at the same rate. It’s the single discount rate that makes the present value of all cash flows equal to the market price. YTM is the most common yield measure, but it assumes reinvestment at the YTM rate — an assumption that’s often unrealistic.

Flat price vs. full price: The flat (clean) price is the quoted price; the full (dirty) price adds accrued interest. Full price = flat price + accrued interest. Between coupon dates, the buyer pays the full price because the seller has earned interest since the last coupon date.

Key Price-Yield Relationships

Five fundamental relationships you must know cold:

1. Inverse relationship: When yields rise, bond prices fall; when yields fall, prices rise. This is the most basic fixed-income principle.

2. Coupon effect: For a given maturity and yield change, lower-coupon bonds are more price-sensitive than higher-coupon bonds. Zero-coupon bonds are the most price-sensitive.

3. Maturity effect: For a given coupon and yield change, longer-maturity bonds are generally more price-sensitive than shorter-maturity bonds.

4. Constant-yield price trajectory: As a bond approaches maturity, its price converges toward par — premium bonds decline toward par, discount bonds rise toward par. This “pull to par” effect represents the amortization of the premium or discount.

5. Convexity effect: The price-yield relationship is curved (convex), not linear. A yield decrease causes a larger price increase than an equal yield increase causes a price decrease. This asymmetry benefits bondholders — all else equal, more convexity is better.

Matrix pricing: For bonds that don’t trade frequently, matrix pricing estimates fair value using the yields of traded bonds with similar characteristics (credit quality, maturity). The curriculum walks through the interpolation process step by step.

LM 7: Yield and Yield Spread Measures for Fixed-Rate Bonds

Periodicity and annualized yields: Semi-annual bond-equivalent yields, annual effective yields, and converting between periodicities. A semi-annual yield of 3% corresponds to an annual effective yield of (1.03)² − 1 = 6.09%, not 6%. This conversion is heavily tested.

Other yield measures: Current yield (annual coupon / price — ignores capital gains/losses), yield-to-call (for callable bonds — yield assuming the bond is called at the first call date), yield-to-worst (the lowest of YTM and all yield-to-call calculations — the conservative measure), and street convention vs. true yield.

Yield spreads: The G-spread (spread over the government benchmark bond), I-spread (spread over the swap rate), and Z-spread (the constant spread added to each spot rate on the government curve that makes the bond’s discounted cash flows equal to its market price). The Z-spread is the most precise because it accounts for the shape of the yield curve, not just a single benchmark point.

LM 8: Yield and Yield Spread Measures for Floating-Rate Instruments

Floating-rate notes (FRNs) reset their coupon periodically based on a reference rate plus a quoted margin. The discount margin is the spread that equates the FRN’s present value to its market price — it’s the floating-rate equivalent of the Z-spread. If the discount margin equals the quoted margin, the FRN trades at par. If credit quality deteriorates (discount margin exceeds quoted margin), the FRN trades below par.

Money market instruments: The curriculum covers the distinction between discount rates (T-bills) and add-on rates (bank deposits, CDs), and the conversion between the two. These are mechanical calculations but easy points if you practice them.

LM 9: Term Structure — Spot, Par, and Forward Curves

One of the most conceptually dense modules in all of Fixed Income — and heavily tested.

Spot rates are the yields on zero-coupon bonds for each maturity. The spot rate curve is the fundamental building block — every fixed-income security can be priced by discounting each cash flow at the appropriate spot rate for its timing.

Par rates are the coupon rates that make a bond trade at par given the spot rate curve. Forward rates are the implied future spot rates derived from the current spot curve. The curriculum covers bootstrapping (deriving spot rates from par rates), calculating forward rates from spot rates, and the reverse — calculating spot rates from forward rates.

The relationships between these three curves: when the spot curve is upward-sloping, forward rates are above spot rates, and par rates are below spot rates. When the spot curve is flat, all three are equal. Understanding these relationships and being able to derive one curve from another is essential.

Block 3: Interest Rate Risk — Duration and Convexity (LM 10–13)

LM 10: Interest Rate Risk and Return

This module introduces the three sources of return from investing in a fixed-rate bond: coupon payments, reinvestment income (interest earned on reinvested coupons), and capital gains or losses from price changes. The key insight: interest rate risk has two opposing effects — when rates rise, bond prices fall (bad for price return) but reinvestment income increases (good for reinvestment return). These effects offset each other exactly at one specific holding period: the Macaulay duration.

Macaulay duration: The weighted average time to receive the bond’s cash flows, where weights are the present values of each cash flow divided by the total price. It represents the investment horizon at which price risk and reinvestment risk exactly offset — making it the “immunization” point. Macaulay duration is measured in years.

LM 11: Yield-Based Bond Duration Measures and Properties

The single most important risk measure in fixed income.

Modified duration = Macaulay duration / (1 + YTM per period). It measures the percentage price change for a 1% change in yield:

The negative sign reflects the inverse price-yield relationship. A bond with modified duration of 5 will lose approximately 5% of its value if yields rise by 1%.

Approximate modified duration: Calculated using the bond’s price sensitivity to small yield changes: (P₋ − P₊) / (2 × P₀ × ΔYield). This formula is explicitly testable.

Money duration = Modified duration × market value. It gives the absolute dollar change for a 1% yield change. Price value of a basis point (PVBP) = money duration × 0.0001 — the dollar price change for a 1 bp yield change.

Properties of Duration

Know these relationships: duration increases with maturity (generally), decreases with higher coupon rate, decreases with higher YTM, and equals maturity for zero-coupon bonds. The duration of a floating-rate note is approximately zero (resets to par at each reset date). The duration of a perpetual bond = (1 + YTM) / YTM.

LM 12: Yield-Based Bond Convexity and Portfolio Properties

Convexity captures the curvature of the price-yield relationship that duration alone misses. Duration is a linear approximation; convexity adds the second-order correction:

The convexity term is always positive for option-free bonds — making the price increase from a yield decrease larger than the price decrease from an equal yield increase. Investors prefer higher convexity (all else equal) because it provides better upside and less downside.

Portfolio duration and convexity: The portfolio’s duration is the market-value-weighted average of individual bond durations. Same for convexity. This allows you to manage portfolio risk by adjusting the mix of bonds to achieve a target duration.

LM 13: Curve-Based and Empirical Risk Measures

This module extends beyond yield-based measures. Effective duration uses the benchmark yield curve rather than a bond’s own YTM — important for bonds with embedded options where cash flows change with rate levels. Key rate duration measures sensitivity to shifts at specific maturities on the yield curve (e.g., sensitivity to the 5-year rate vs. the 10-year rate). Empirical duration is estimated statistically from observed price and yield data — useful when analytical duration doesn’t capture actual market behavior (e.g., for bonds in distressed or highly volatile markets).

Block 4: Credit Risk and Securitization (LM 14–19)

LM 14: Credit Risk

Two sources of credit risk: default risk (the probability the issuer fails to pay) and credit spread risk (the risk that the spread over the benchmark widens, reducing the bond’s price even without default). Credit risk is measured through: probability of default, loss given default (1 − recovery rate), and expected loss = probability of default × loss given default × exposure at default.

The curriculum covers credit rating agencies (Moody’s, S&P, Fitch), the rating scale (AAA to D, with investment grade being BBB−/Baa3 and above), and the factors that drive credit spreads — macroeconomic conditions (spreads widen in recessions), market liquidity, and issuer-specific factors (leverage, coverage ratios, industry risk).

The price impact of spread changes is measured using spread duration: %ΔP ≈ −SpreadDur × ΔSpread. This is analogous to modified duration but applies to credit spread changes rather than benchmark yield changes.

LM 15: Credit Analysis for Government Issuers

Sovereign credit analysis examines both qualitative factors (institutional strength, governance quality, policy effectiveness, economic structure) and quantitative factors (GDP growth, debt-to-GDP, fiscal balance, current account balance, external debt, foreign currency reserves). The curriculum covers why sovereigns rarely default in their own currency (they can print money) but may default on foreign-currency debt.

Non-sovereign credit: Government agencies, development banks, supranational issuers, and regional/local governments. Each has different credit characteristics — some carry implicit government guarantees, others are standalone credit risks.

LM 16: Credit Analysis for Corporate Issuers

The practical module — how analysts assess corporate creditworthiness. Qualitative factors: Industry structure and competitive position, management quality, strategy, and governance. Financial ratios: The curriculum covers the key credit ratios: leverage ratios (debt-to-EBITDA, debt-to-capital), coverage ratios (EBITDA-to-interest, EBIT-to-interest, FFO-to-debt), and profitability measures. These connect directly to the ratio analysis in FRA.

Seniority rankings and recovery rates: Secured debt (backed by specific collateral) recovers more than unsecured. Senior claims recover more than subordinated. The curriculum provides typical recovery rates by seniority class and explains why issue ratings can differ from issuer ratings — a BBB-rated company might have an A-rated secured bond and a BB-rated subordinated bond.

LM 17–19: Securitization, ABS, and MBS

These three modules cover structured finance — a specialized but increasingly tested area.

LM 17 (Securitization process): How assets (mortgages, credit card receivables, auto loans) are pooled and repackaged into tradeable securities through a special purpose entity (SPE). Benefits: funding diversification for the originator, risk transfer, and liquidity creation. The SPE is bankruptcy-remote — if the originator fails, the securitized assets are protected.

LM 18 (ABS features): Credit enhancement comes in two forms — internal (subordination/credit tranching, overcollateralization, excess spread) and external (bank guarantees, insurance wraps). Credit tranching creates senior and junior tranches: losses hit the junior (equity) tranche first, protecting senior holders. The curriculum covers specific ABS types: credit card receivable ABS, solar ABS, and collateralized loan obligations (CLOs).

LM 19 (MBS features): The most complex module. Mortgage pass-through securities distribute principal and interest from a pool of mortgages to holders. The key risk is prepayment risk — homeowners can refinance or sell, returning principal early. Prepayment risk has two components: contraction risk (rates fall, prepayments accelerate, duration shortens when you don’t want it to) and extension risk (rates rise, prepayments slow, duration extends when you don’t want it to).

Collateralized mortgage obligations (CMOs) redistribute prepayment risk through time tranching: sequential-pay structures (early principal goes to the first tranche, providing shorter duration), planned amortization classes (PACs, which provide predictable cash flows within a range of prepayment speeds at the expense of support tranches), and other structures. CMBS (commercial mortgage-backed securities) have different characteristics — commercial mortgages are non-recourse, and the key risk is the ability of the underlying property to generate sufficient cash flow.

Study Strategy for Fixed Income

Three weeks, 36 hours, 19 modules — you need a plan within the plan.

Week 1 (LM 1–8): Move quickly through the descriptive material (LM 1–5) — spend about 30% of your time here. Slow down for LM 6 (bond pricing) and LM 7 (yield spreads). These are the computational foundation for everything that follows.

Week 2 (LM 9–13): This is the hardest week. The term structure (LM 9) and duration/convexity (LM 11–12) modules are the most quantitative and most tested. Spend 40% of your total FI time on this block. Practice bootstrapping, forward rate calculations, and duration-based price approximations until they’re automatic.

Week 3 (LM 14–19): Credit analysis and securitization. LM 14 (credit risk fundamentals) and LM 16 (corporate credit analysis) are the highest-priority modules in this block. LM 17–19 (securitization) require conceptual understanding — focus on the structures and risks, not memorizing every detail.

Throughout all three weeks, connect the material back to TVM principles from Quant and to the interest rate and monetary policy concepts from Economics. And drill the formulas — Fixed Income has more testable formulas than any other topic.