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CFA Level I · CFA Level I Exam

Fixed-Income Instrument Features for CFA Level I

Fixed-income instrument features are the contract terms that define a bond: issuer, maturity, principal, coupon, currency, repayment pattern, embedded options and legal protections. To solve questions, read the terms, build the cash flow timeline, then judge who benefits from each feature and how it moves price and yield.

What this chapter covers

This chapter teaches you how a bond is built. You learn the basic parts: issuer, maturity, par value, coupon rate, and currency. Then you see how coupons can be fixed, floating, step-up or zero. You also see how principal is repaid, either all at maturity (bullet) or gradually (amortizing). Finally you meet embedded options, covenants, and the legal and tax setting.

The chapter is mostly descriptive, but it is not a memory dump. Most questions ask you to link a feature to an outcome. For example: who gains from a call option, what happens to cash flows when a reference rate rises, or why a covenant protects lenders. Expect short scenario stems with three options.

This chapter is the foundation for the rest of Fixed Income. Bond pricing, yield measures, duration, convexity, credit analysis, securitization and mortgage-backed securities all depend on knowing the cash flows a bond promises. If the features are unclear, the later math feels arbitrary. It also links to Corporate Finance (debt financing), Financial Statement Analysis (liabilities) and Derivatives (options logic).

Fixed Income carries a topic weight of 11-14% in the 2027 curriculum, and this chapter is the vocabulary layer for all of it. Questions here are usually quick to answer if you know the terms, so they are good marks for modest effort. The same ideas also show up inside later chapters on valuation, duration and credit, so a weak grasp here costs you marks in several places. There is no penalty for wrong answers, but clear knowledge lets you eliminate two options fast and save time for harder calculation items.

Fixed-Income Instrument Features: topics in the order to study them

  1. 1Fixed-Income Instrument BasicsStart here because issuer, maturity, par value, coupon and currency are the terms every later topic assumes.
  2. 2Coupon StructuresOnce you know the basic terms, learn how coupons are set and how fixed, floating, step-up and zero structures change cash flows.
  3. 3Maturity, Principal Repayment and AmortizationNext, add the timing of principal: bullet, fully amortizing and partially amortizing structures, which shape the full cash flow timeline.
  4. 4Embedded Options and Contingency ProvisionsWith cash flows clear, you can judge how call, put, conversion and similar features help the issuer or the bondholder.
  5. 5Legal, Regulatory and Tax ConsiderationsFinish with the legal framework, covenants and tax treatment, which sit around the contract and are easier once the features are known.

How to prepare Fixed-Income Instrument Features

Treat this chapter as a set of cause-and-effect links, not a glossary. Aim to explain each feature in one sentence and say who it favours.

  1. Read the basic terms first and write a one-line definition of each: issuer, maturity, par value, coupon rate, coupon frequency, currency.
  2. For every coupon type, sketch a simple timeline of cash flows. Mark what is fixed and what changes, such as a floating rate equal to a reference rate plus a spread.
  3. Compare bullet, fully amortizing and partially amortizing bonds side by side. Note when principal is paid and how that affects the outstanding balance.
  4. For each embedded option, ask two questions: who holds the right, and does it make the bond more or less valuable to the investor? Build a small table on paper, not in the answer.
  5. Learn covenants in two groups: affirmative (what the issuer must do) and negative (what it must not do). Practise sorting examples into each group.
  6. Do short mixed question sets in one sitting. For each wrong answer, note which feature you mixed up and revisit it the same day.
  7. On the last day, reread your one-line definitions and the who-benefits notes only.

Common mistakes in Fixed-Income Instrument Features

  • Mixing up who benefits from call and put options.

    Fix: Ask who can exercise. The issuer calls the bond back; the bondholder puts it back to the issuer. Then decide the effect on required yield.

  • Treating amortizing bonds as if all principal is repaid at maturity.

    Fix: Check the repayment pattern first. For amortizing bonds, picture payments that include both interest and principal and a falling balance.

  • Using the wrong coupon base in a coupon calculation.

    Fix: Apply the coupon rate to par value, then divide by payments per year. Do this before any pricing step.

  • Confusing floating-rate structures with changing credit quality.

    Fix: Floating coupons move with a reference rate plus a quoted spread. The spread reflects credit risk at issue; the reference rate drives the reset.

  • Mixing up affirmative and negative covenants.

    Fix: Affirmative means must do (for example, maintain insurance or pay taxes). Negative means must not do (for example, limit extra debt or restrict asset sales).

  • Memorising feature names without linking them to yield and price.

    Fix: For every feature, add one line: favours issuer or investor, and what that implies for the yield an investor would demand.

Last-day revision: Fixed-Income Instrument Features

  • A bond's contract sets issuer, maturity, par value, coupon rate and frequency, and currency.
  • Par value is the principal repaid at maturity; coupon payment = coupon rate × par value ÷ payments per year.
  • Floating-rate coupon = reference rate + spread; the cash flows move with the reference rate.
  • A zero-coupon bond pays no coupons and is issued at a discount to par.
  • A step-up coupon rises on a schedule set in advance.
  • A bullet bond repays all principal at maturity; an amortizing bond repays principal over its life.
  • A fully amortizing bond has zero balance at maturity; a partially amortizing bond leaves a balloon payment.
  • A call option benefits the issuer; a put option benefits the bondholder.
  • A conversion option lets the holder exchange the bond for shares, so the investor typically accepts a lower coupon.
  • Affirmative covenants require actions; negative covenants restrict actions; both protect lenders.
  • Features that favour the issuer usually require a higher yield; features that favour the investor allow a lower yield.
  • Always read who holds the option before judging its effect.

Fixed-Income Instrument Features practice questions

Fixed-Income Instrument Features in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fixed-Income Instrument Features: frequently asked questions

How hard is the Fixed-Income Instrument Features chapter in CFA Level I?

It is one of the lighter chapters in Fixed Income because it is mostly conceptual. The difficulty is the number of similar terms. Link each feature to who benefits and you will answer most questions quickly.

Do I need a calculator for this chapter?

Very little. You may compute a coupon payment or follow a simple amortization pattern, which needs only basic arithmetic. The heavier use of the TI BA II Plus or HP 12C comes in later pricing and yield chapters.

Why does this chapter matter for later Fixed Income topics?

Pricing, duration, convexity, credit analysis and securitization all start from the promised cash flows and embedded options. If you misread the features, you will set up later calculations wrongly.

How should I study embedded options for the exam?

Do not just memorise the list. For each option, state who holds the right and whether it raises or lowers the bond's value to an investor. Questions are usually scenario-based, so this reasoning lets you eliminate two of the three choices.