Chapter 1: Orientation to Level II Fixed Income
- 1.1 Scope of Fixed Income at Level II
- 1.2 Vignette-Style Exam Format and Tips
- 1.3 Core Concepts from Level I Review
- 1.4 Building a Study Roadmap
Chapter 2: Fixed Income Instruments Overview
- 2.1 Types of Bonds: Government, Corporate, Securitized
- 2.2 Coupon Structures and Day Count Conventions
- 2.3 Floating-Rate Notes and Step-Up Bonds
- 2.4 Vignette Example: Identifying Bond Features
Chapter 3: Yield Measures and Bond Pricing Basics
- 3.1 Yield to Maturity, Current Yield, and Other Measures
- 3.2 Price-Yield Relationship and Bond Math
- 3.3 Accrued Interest and Full vs. Clean Price
- 3.4 Practice Vignette: Comparing Yield Metrics
Chapter 4: The Term Structure of Interest Rates
- 4.1 Spot Rates, Par Rates, Forward Rates
- 4.2 Bootstrapping the Zero-Coupon Curve
- 4.3 Traditional Theories of the Yield Curve
- 4.4 Item Set: Deriving Forward Rates in a Vignette
Chapter 5: Interest Rate Volatility and Benchmarks
- 5.1 Maturity Structure of Yield Volatilities
- 5.2 Swap Curves and Swap Spreads
- 5.3 LIBOR/SOFR Transition and Market Impacts
- 5.4 Vignette Drill: Interpreting Benchmark Shifts
Chapter 6: Active Bond Portfolio Management
- 6.1 Rolling Down the Yield Curve
- 6.2 Riding the Yield Curve Strategies
- 6.3 Duration Targeting and Convexity Adjustments
- 6.4 Vignette: Yield Curve Trades under Different Forecasts
Chapter 7: Arbitrage-Free Valuation Framework
- 7.1 Law of One Price and No-Arbitrage Valuation
- 7.2 Valuing Zero-Coupon Instruments
- 7.3 Pathwise vs. Spot Curve Pricing
- 7.4 Practice Vignette: Constructing Arbitrage-Free Prices
Chapter 8: Binomial Interest Rate Tree Models
- 8.1 Building and Calibrating the Tree
- 8.2 Backward Induction Valuation Process
- 8.3 Forward Probabilities and Risk-Neutral Approach
- 8.4 Sample Item Set: Tree-Based Pricing for Coupon Bonds
Chapter 9: Monte Carlo Simulation for Fixed Income
- 9.1 Forward-Rate Simulation Techniques
- 9.2 Advantages vs. Binomial Trees
- 9.3 Capturing Path-Dependency in Cash Flows
- 9.4 Vignette: Sensitivity to Volatility in Simulations
Chapter 10: Bonds with Embedded Options—Introduction
- 10.1 Callable and Putable Bonds
- 10.2 Valuing Straight Bonds vs. Embedded-Option Bonds
- 10.3 Impact of Interest Rate Volatility on Options
- 10.4 Practice Vignette: Identifying Option Value
Chapter 11: Analyzing Callable and Putable Bonds
- 11.1 Option-Adjusted Spread (OAS) Computation
- 11.2 Effective Duration and One-Sided Durations
- 11.3 Negative Convexity in Callable Bonds
- 11.4 Vignette Exercise: Calculating OAS and Effective Duration
Chapter 12: Convertible Bonds and Other Hybrids
- 12.1 Conversion Features and Equity Upside
- 12.2 Contingent Convertibles (CoCos)
- 12.3 Arbitrage-Free Valuation of Convertibles
- 12.4 Vignette: Modeling Conversion Scenarios
Chapter 13: Mortgage-Backed Securities (MBS) Overview
- 13.1 Mortgage Pass-Through Basics
- 13.2 Prepayment Risk and Contraction/Extension
- 13.3 Weighted Average Maturity (WAM) and WAC
- 13.4 Practice Item Set: MBS Cash Flow Projections
Chapter 14: Collateralized Mortgage Obligations (CMOs)
- 14.1 CMO Tranches: Sequential, PAC, Support
- 14.2 PAC Collar, Support Bonds, and Extension Risk
- 14.3 Valuing CMOs in a Changing Rate Environment
- 14.4 Vignette: Allocating Cash Flows to Tranches
Chapter 15: Asset-Backed Securities (ABS) Essentials
- 15.1 ABS Structures: Auto Loans, Credit Cards
- 15.2 Securitization Process and Key Parties
- 15.3 Credit Enhancement: Internal vs. External
- 15.4 Item Set: ABS Credit Analysis in a Vignette
Chapter 16: Commercial Mortgage-Backed Securities (CMBS)
- 16.1 CMBS Structures and Call Protection
- 16.2 Balloon Risk and Prepayment Lockouts
- 16.3 Analyzing Property-Based Cash Flows
- 16.4 Vignette: CMBS Features and Underwriting
Chapter 17: Collateralized Debt Obligations (CDOs)
- 17.1 CDO Types: CLOs, CBOs, and Synthetic CDOs
- 17.2 Equity, Mezzanine, and Senior Tranches
- 17.3 Manager’s Role and Collateral Selection
- 17.4 Practice Vignette: Evaluating CDO Credit Structure
Chapter 18: Introduction to Credit Risk Analysis
- 18.1 Expected Exposure, LGD, and Probability of Default
- 18.2 Credit Ratings vs. Credit Scores
- 18.3 Determining Recovery Rates
- 18.4 Item Set: Loss Given Default Calculation
Chapter 19: Structural Credit Risk Models
- 19.1 Merton Model Basics
- 19.2 Equity as a Call Option on the Firm’s Assets
- 19.3 Strengths and Limitations of Structural Models
- 19.4 Vignette Scenario: Calculating Distance to Default
Chapter 20: Reduced-Form Credit Risk Models
- 20.1 Intensity Models and Default Intensities
- 20.2 Credit Spread Modeling
- 20.3 Strengths and Limitations of Reduced-Form Approach
- 20.4 Practice Vignette: Default Probabilities in a Reduced-Form Model
Chapter 21: Credit Valuation Adjustment (CVA)
- 21.1 Definition and Components of CVA
- 21.2 Measuring Credit Exposure Over Time
- 21.3 Practical Approaches to CVA Hedging
- 21.4 Vignette: Calculating and Interpreting CVA
Chapter 22: Term Structure of Credit Spreads
- 22.1 Determinants of Credit Spread Shapes
- 22.2 Rating Transitions and Their Impact
- 22.3 Credit Curve Investing Strategies
- 22.4 Item Set: Shifts in the Term Structure of Credit Risk
Chapter 23: Credit Default Swaps (CDS)
- 23.1 Single-Name vs. Index CDS Contracts
- 23.2 CDS Mechanics and Settlement Protocols
- 23.3 Pricing and Factors Affecting CDS Spreads
- 23.4 Vignette: Navigating CDS in a Portfolio Context
Chapter 24: Using Derivatives in Fixed Income
- 24.1 Forward Rate Agreements (FRAs) and Futures
- 24.2 Interest Rate Swaps and Swap Spreads
- 24.3 Bond Futures and Hedging Techniques
- 24.4 Vignette Practice: Hedging a Bond Portfolio
- 24.5 Interest Rate Options (Caps, Floors, Swaptions)
- 24.6 Cross-Currency Swaps and Hedging
Chapter 25: Measuring Interest Rate Risk
- 25.1 Macaulay Duration vs. Modified Duration
- 25.2 Key Rate Durations and Shaping Risk
- 25.3 Convexity Effects and Portfolio Rebalancing
- 25.4 Item Set: Duration-Based Risk Calculations
Chapter 26: Managing Yield Curve and Spread Risks
- 26.1 Parallel Shifts vs. Twists vs. Curvature Changes
- 26.2 Bullet vs. Barbell Strategies
- 26.3 Hedging with Swaps and Other Instruments
- 26.4 Vignette: Multi-Factor Risk Management
Chapter 27: Fixed Income Portfolio Construction
- 27.1 Benchmark Selection and Tracking Error
- 27.2 Active vs. Passive Bond Strategies
- 27.3 Sector Rotation and Security Selection
- 27.4 Vignette: Portfolio Construction under Constraints
Chapter 28: Performance Evaluation in Fixed Income
- 28.1 Return Attribution: Duration, Spread, and Currency
- 28.2 Risk-Adjusted Performance Metrics
- 28.3 Decomposing Excess Return over Benchmark
- 28.4 Item Set: Interpreting Performance Attribution Data
- 28.5 Additional Considerations in Performance Evaluation
Chapter 29: Global Bonds and Currency Risk
- 29.1 Currency Exposure and Hedging Techniques
- 29.2 Local-Currency vs. Hard-Currency Debt
- 29.3 Emerging Market Fixed Income Risks
- 29.4 Vignette: FX Impact on Global Bond Portfolios
Chapter 30: Special Topics—Inflation-Linked Bonds
- 30.1 TIPS, Inflation Caps/Floors
- 30.2 Indexing Mechanisms and Break-Even Inflation
- 30.3 Valuation Adjustments in Inflation-Linked Securities
- 30.4 Practice Vignette: Analyzing TIPS Yields
Chapter 31: ESG Considerations in Fixed Income
- 31.1 Green Bonds, Social Bonds, and Sustainability-Linked Debt
- 31.2 Incorporating ESG Metrics into Credit Analysis
- 31.3 Impact on Spreads and Scoring
- 31.4 Vignette Exercise: ESG Factors in Bond Selection
Chapter 32: Final Review and Mock Vignettes
- 32.1 Comprehensive Mixed-Topic Exercises
- 32.2 Cross-Referencing Duration, Credit, and Optionality
- 32.3 Time Management and Test-Taking Strategies
- 32.4 Conclusion and Next Steps
- 32.5 Additional Resources and Practice Tools

Chapter 24: Using Derivatives in Fixed Income

In this section

Forward Rate Agreements (FRAs) and Futures
Learn the mechanics, uses, and comparative benefits of Forward Rate Agreements and short-term interest rate futures for hedging and speculation in fixed income portfolios.
Interest Rate Swaps and Swap Spreads
Explore how plain vanilla interest rate swaps transform fixed and floating payment streams, learn about swap spreads, and gain insights into managing portfolio risk in OTC and cleared swap markets.
Bond Futures and Hedging Techniques
Learn how portfolio managers use bond futures to hedge interest rate risk, implement tactical yield curve trades, and manage roll risk in a practical yet comprehensive way.
Vignette Practice: Hedging a Bond Portfolio
Explore practical strategies for using derivatives—futures, swaps, and FRAs—to hedge or adjust interest rate exposure in a bond portfolio. Learn step-by-step calculations, hedge ratio derivations, and essential best practices to manage duration and mitigate basis risk.
Interest Rate Options (Caps, Floors, Swaptions)
A comprehensive exploration of caps, floors, and swaptions—essential derivative instruments for advanced interest rate risk management and hedging within fixed income portfolios.
Cross-Currency Swaps and Hedging
A comprehensive exploration of converting foreign-currency bond cash flows and managing multi-currency exposures using cross-currency swaps, including practical examples, diagrams, risk considerations, and best practices.

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Chapter 23: Credit Default Swaps (CDS)

Chapter 25: Measuring Interest Rate Risk

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Chapter 24: Using Derivatives in Fixed Income

In this section