CFA Level 2: Fixed Income Part 1 – Introduction

This tutorial is the first in two parts covering fixed income.  The objective of these sessions is to build on the foundation created in Level 1 in order to establish a competency of valuing more complex fixed income securities beyond basic coupon paying and zero coupon bonds.

Given the complexity of some of the material plus the need to recall certain concepts from Level 1, candidates are advised to keep Level 1 materials available as reference when preparing for the Level 2 fixed income questions.

A reasonable expectation for students is to expect two item sets (twelve questions) on the exam covering material from parts 1 and 2 of fixed income.

This module aligns with Study Session 14 material in the Level II CFA Program Curriculum ©.


The Fixed Income topics of the Level 2 exam draw heavily upon the foundation created in Level 1.  Candidates are strongly encouraged to review the following from Level 1:

  • How to value annual pay bonds with a CFA approved calculator.
  • How to value zero coupon bonds with a CFA approved calculator.
  • The relationship between par, spot, and forward interest rates.
  • The concept and formula to calculate a bond’s effective duration.

Effective Duration = (Bond Price lower rate – Bond Price higher rate) / (2 * Bond Price current * change in interest rate)

Effective Convexity = (Bond Price lower rate + Bond Price higher rate - (2 * Bond Price current)) / (2 * Bond Price current * change in interest rate2)

  • Negative convexity of callable bonds on the price-yield graph.
  • Price floor of a putable bond on the pried-yield graph.

Never, ever, ever, ever forget that the value of a bond moves inversely with interest rate changes!  If interest rates go up, then the value of the bond will drop.


The following material will be covered in this tutorial:

I.          Credit Analysis

II.        The Term Structure and Volatility of Interest Rates

III.       Bonds with Embedded Options

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