CFA Level 1 Study Notes – Fixed Income

Study Session 14

Reading 42 (39 in 2022) – Fixed-Income Securities: Defining Elements

– LOS 42a: describe basic features of a fixed-income security
– LOS 42b: describe content of a bond indenture
– LOS 42c: compare affirmative and negative covenants and identify examples of each
– LOS 42d: describe how legal, regulatory, and tax considerations affect the issuance and trading of fixed-income securities
– LOS 42e: describe how cash flows of fixed-income securities are structured
– LOS 42f: describe contingency provisions affecting the timing and/or nature of cash flows of fixed-income securities and identify whether such provisions benefit the borrower or the lender
– LOS 42x: describe different types of bonds and their specific features

Reading 43 (40 in 2022) – Fixed-Income Markets: Issuance, Trading and Funding

– LOS 43a: describe classifications of global fixed-income markets
– LOS 43b: describe the use of interbank offered rates as reference rates in floating-rate debt
– LOS 43c: describe mechanisms available for issuing bonds in primary markets
– LOS 43d: describe secondary markets for bonds
– LOS 43e: describe securities issued by sovereign governments
– LOS 43f: describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies
– LOS 43g: describe types of debt issued by corporations
– LOS 43h: describe structured financial instruments
– LOS 43i: describe short-term funding alternatives available to banks
– LOS 43j: describe repurchase agreements and the risks associated with them

Reading 44 (41 in 2022)- Introduction to Fixed-Income Valuation

– LOS 44a: calculate a bond’s price given a market discount rate
– LOS 44b: identify the relationships among a bond’s price, coupon rate, maturity, and market discount rate (yield-to-maturity)
– LOS 44c: define spot rates and calculate the price of a bond using spot rates
– LOS 44d: describe and calculate the flat price, accrued interest, and the full price of a bond
– LOS 44e: describe matrix pricing
– LOS 44f: calculate annual yield on a bond for varying compounding periods in a year
– LOS 44g: calculate and interpret yield measures for fixed-rate bonds and floating-rate notes

– LOS 44h: calculate and interpret yield measures for money market instruments
– LOS 44i: define and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve
– LOS 44j: define forward rates and calculate spot rates from forward rates, forward rates from spot rates, and the price of a bond using forward rates
– LOS 44k: compare, calculate, and interpret yield spread measures

Reading 45 (42 in 2022) – Introduction to Asset-Backed Securities

– LOS 45a: explain benefits of securitization for economies and financial markets
– LOS 45b: describe securitization, including the parties involved in the process and the roles they play
– LOS 45c: describe typical structures of securitizations, including credit tranching and time tranching
– LOS 45d: describe types and characteristics of residential mortgage loans that are typically securitized
– LOS 45e: describe types and characteristics of residential mortgage-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, and explain the cash flows and risks for each type
– LOS 45f: define prepayment risk and describe the prepayment risk of mortgage-backed securities
– LOS 45g: describe characteristics and risks of commercial mortgage-backed securities
– LOS 45h: describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type
– LOS 45i: describe collateralized debt obligations, including their cash flows and risks

New LOS in 2022

LOS j: describe characteristics and risks of covered bonds and how they differ from other asset-backed securities

Study Session 15

Reading 46 (43 in 2022) – Understanding Fixed-Income Risk and Return

– LOS 46a: calculate and interpret the sources of return from investing in a fixed-rate bond
– LOS 46b: define, calculate, and interpret Macaulay, modified, and effective durations
– LOS 46c: explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options
– LOS 46d: define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the benchmark yield curve
– LOS 46e: explain how a bond’s maturity, coupon, and yield level affect its interest rate risk
– LOS 46f: calculate the duration of a portfolio and explain the limitations of portfolio duration
– LOS 46g: calculate and interpret the money duration of a bond and price value of a basis point (PVBP)
– LOS 46h: calculate and interpret approximate convexity and distinguish between approximate and effective convexity
– LOS 46i: estimate the percentage price change of a bond for a specified change in yield, given the bond’s approximate duration and convexity
– LOS 46j: describe how the term structure of yield volatility affects the interest rate risk of a bond
– LOS 46k: describe the relationships among a bond’s holding period return, its duration, and the investment horizon
– LOS 46l: explain how changes in credit spread and liquidity affect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes

New loss in 2022

LOS m: describe the difference between empirical duration and analytical duration.

Reading 47 (44 in 2022) – Fundamentals of Credit Analysis

– LOS 47a: describe credit risk and credit-related risks affecting corporate bonds
– LOS 47b: describe default probability and loss severity as components of credit risk
– LOS 47c: describe seniority rankings of corporate debt and explain the potential violation of the priority of claims in a bankruptcy proceeding
– LOS 47d: distinguish between corporate issuer credit ratings and issue credit ratings and describe the rating agency practice of “notching”
– LOS 47e: explain risks in relying on ratings from credit rating agencies
– LOS 47f: explain the four Cs (Capacity, Collateral, Covenants, and Character) of traditional credit analysis
– LOS 47g: calculate and interpret financial ratios used in credit analysis
– LOS 47h: evaluate the credit quality of a corporate bond issuer and a bond of that issuer, given key financial ratios of the issuer and the industry
– LOS 47i: describe factors that influence the level and volatility of yield spreads
– LOS 47j: explain special considerations when evaluating the credit of high yield, sovereign, and non-sovereign government debt issuers and issues