What CFA Level 1 Fixed Income actually tests
Fixed Income is 11-14% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Bond Features | Indenture, covenants, embedded options, seniority, securitisation |
| Bond Markets | Primary/secondary markets, OTC vs. exchange, repo market |
| Bond Valuation | Full/flat price, accrued interest, YTM, spot rates, forward rates |
| Yield Measures | Current yield, YTM, YTC, YTP, bond-equivalent yield, effective annual yield |
| Term Structure | Expectations, liquidity preference, market segmentation theories |
| Duration | Macaulay, modified, effective, dollar duration, convexity |
| Credit Risk | Default probability, loss severity, credit ratings, high-yield vs. investment-grade |
| Structured Products | MBS, ABS, CDO, CMO, prepayment risk |
Duration vs. modified duration — the distinction that costs marks
Macaulay duration is a time measure (a weighted-average number of years). Modified duration is a price-sensitivity measure derived from it. Candidates who memorize the Macaulay formula but not the adjustment often answer a "how much will the price move" question with the wrong number — off by the (1 + yield) factor.
Sample question: Modified Duration
Fixed Income · Medium difficulty
A bond has a Macaulay duration of 8.5 years and a yield to maturity of 6% (annual compounding). What is the bond's modified duration?
A. 7.55 years
B. 8.02 years
C. 8.50 years
D. 9.01 years
The correct answer is B — 8.02 years.
Modified Duration = Macaulay Duration / (1 + YTM) = 8.5 / 1.06 = 8.02 years. This means a 1% change in yield moves the bond's price by approximately 8.02% — always slightly lower than the Macaulay figure since it's discounted by one period of the yield.
Modified Duration = Macaulay Duration / (1 + YTM) = 8.5 / 1.06 = 8.02 years. This means a 1% change in yield moves the bond's price by approximately 8.02% — always slightly lower than the Macaulay figure since it's discounted by one period of the yield.