Updated: December 07, 2022

CFA Exam: Level 1 / Topics / 3 Hardest

CFA exam candidates who take their level 1 exam usually indicate FI, Derivatives, and FSA (or FRA)* to be the most difficult. We couldn’t agree more... So, it seems that the 3 hardest level 1 CFA exam topics are:

    1. Fixed Income (FI),

    2. Derivatives (DER),

    3. Financial Statement Analysis (FSA)*.

It's true that the 3 topics are very different from each other when it comes to their exam weight or the number of modules in your level 1 curriculum. You can find all 10 topics analyzed here, and the 3 most difficult topics are compared below for convenience:

Note that readings have been replaced with modules in the 2023 level 1 CFA exam curriculum but it's only a change in nomenclature.

Level 1 CFA Exam Topic Short Description Topic Weight No. of Modules
in 2023
No. of Formulas Predicted No. of Questions
Financial Statement Analysis* Financial statements + Accounting methods + Reporting standards 13-17% 12 nearly 100 ca. 26
Fixed Income Bond features, yields & markets 10-12% 6 around 40 ca. 20
Derivatives Forwards vs futures
vs options vs swaps
5-8% 10 around 30 ca. 10

* Before 2022, CFA Program curriculum referred to Financial Statement Analysis as Financial Reporting and Analysis (FRA for short).

OK, Financial Statement Analysis looks rather dangerous: 12 modules (going over 700 pages in your CFA Program curriculum!), nearly 100 formulas, and all this tested in as many as 26 out of 180 level 1 exam questions (or even more).

But Fixed Income with its exam weight of 10-12% looks much less scary, not to mention Derivatives... Topic weight: only 5-8%. Sure there are 10 modules but they are rather short and go for just around 120 pages in your CFA exam curriculum.

Here's the first tricky thing you must understand about level 1 CFA exam topics: it’s not the length or weight in the exam that makes a topic difficult. It’s its substance, curriculum contents, what's written on the topic, and how it's written!

So, although difficulty is a subjective criterion, there is an objective reason why these 3 choices are probably correct for the majority of level 1 candidates: all 3 topics are strictly conceptual plus they contain many things you’ve probably never heard of before.

What it means is that there’s a lot to remember and this lot may be hard to understand!

Fixed Income: Tough Theory, Tough Math, Tough Everything...

Have you ever invested in shares? Even if not, you surely know many companies listed on the stock exchange. That’s why equity investments feel quite concrete and intuitive. But debt securities are not something people deal with on a regular basis (especially if they live in a country where the bond market is not as well developed as in the US). Therefore, studying fixed-income securities is more abstract.

In your CFA exam curriculum, you will find 6 modules on Fixed Income:

Module 42: explains nomenclature and different types of fixed-income securities.

Module 43: describes bond markets and basic mechanisms.

Both these modules are purely theoretical and overrun with terms. Were they to be cut down and made into one Intro module, not much would be lost in the sense of getting what fixed-income investments are all about.

Module 44: deals with bond valuation.

You will read about 4 methods of bond valuation here + some complicated concepts like implied forward and spot rates or yield spreads will be also presented. In one of our videos (find it below ), we explain how to value bonds using different calculator worksheets. Surely, it can help.

Module 45: introduces asset-backed securities (ABS).

If you’ve seen Big Short and enjoyed it, the stuff detailed in this module gets more friendly .

Module 46: unveils the notions of fixed-income risk & return.

That’s where the real fun begins! You can’t talk about bond risk & return without getting to know Macaulay duration, modified duration, effective duration, key rate duration, convexity, effective convexity or negative convexity, and duration gap.

Most of these concepts take a form of complex formulas + risk & return analysis is all about relations such as: How does the modified duration change if YTM increases?

Module 47: puts a cherry on top delineating credit analysis.

Fixed Income for Beginners: Suggested Course of Action

So: if you’re not a fixed-income adept and the topic is a hassle for you like for the majority of level 1 candidates, we’d like to propose an alternative module sequence to the one given in your curriculum. It should make your study efforts more effective.

1. Quickly go through Module 42 (Intro) Scan for some major issues.

2. Carefully read Module 44 (Bond Valuation) See our video on bond valuation:

3. Carefully read Module 46 (Risk & Return) Go to our blog post on Fixed Income relations.

4. Watch Big Short (as an Intro to ABS) See the Big Short trailer now:

5. Carefully read Module 45 (ABS)

6. Go back to Module 42 (Intro) Read it thoroughly this time.

7. Carefully read Module 43 (Markets) Fine video available in our paid plan.

8. Carefully read Module 47 (Credit Analysis)

To Cheer You Up

When you get to know about fixed-income investments, you’ll make a better start at derivatives. Bonds can have an impact on derivative instruments and then there are also options – first mentioned in the Fixed Income topic and examined inside out in the Derivatives topic.

It All Starts With Your CFA Exam Study Plan


& customize it to suit your needs!

How Derivatives Constitute The Hardest Part

Is it possible at all that the hardest part of the level 1 curriculum has been hidden in almost the shortest of the topics? Undoubtedly, it is the case for many.

The definition of a derivative already points to the problem. You know a derivative if you know its underlying asset.

"A derivative is a financial instrument whose value depends on the value of some underlying asset."

There is a number of different assets that may serve as underlying assets for derivatives, for example: stocks, stock indices, bonds, interest rates, exchange rates, commodities or other derivative instruments. The change in the value of the underlying asset affects the value of the derivative instrument.

The derivatives you’ll learn about while preparing for your level 1 exam include: forwards, futures, options, and swaps.

Options, or Contingent Claims

The most challenging task is probably to grasp the idea of how options work. There are various types of options, each with different characteristics. We say that options are contingent claims – the long will exercise the option and require that the short complete the transaction only if this transaction is profitable for the long party.

If we were to illustrate the profit from an option, it won’t be a straight line like for forwards or stocks. It makes option valuation extremely complicated. Luckily, option valuation models are left out of the level 1 CFA exam curriculum (apart from a short mention of the binomial option valuation) and you don’t need to worry about that until your level 2 exam.

Long Call Option Profit
Long Forward Profit

Forward Commitments, i.e. Forwards, Futures & Swaps

The main goal with forward commitments is to get the difference between pricing and valuation.

If you take forwards:

Forward price is a fixed price for which the underlying will be purchased in the future.

Forward value – on the other hand – is determined for your position in the contract (that you entered some time ago) and it equals 0 (zero) at contract initiation and changes over time can be positive or negative depending on your position (long, short) and the price of the underlying.

Other DERivatives Concepts

Of course, getting to know different kinds of derivatives is not all. When you get familiar with forwards, futures, options, and swaps, it’s time to look into more enigmatic issues such as arbitrage, forward rate agreements (FRAs), put-call parity or put-call-forward parity. You get it all explained in our premium videos.

Can It Really Be That Bad?

Yes, derivatives are much more puzzling than assets such as shares or even bonds. It’s because derivatives derive their value from underlying assets like shares or bonds.

However, if you feel that options – which are probably the hardest DER stuff – are not your story, you can always give up on them. It’s unlikely that your success in the exam should depend on this one decision. The topic has little weight in the level 1 exam and options are just part of it. You don’t need to study every issue to perfection if otherwise you spend your study time effectively.

Financial Statement Analysis: Both Difficult & Important

If you’ve had little or nothing to do with financial statements, FSA is going to give you some hard time. For the level 1 exam, it’s a lot of theory describing a vast range of accounting concepts.

The first 2 modules deal with different frameworks, reporting standards, and authorities associated with financial reporting and analysis.

The next 3 modules are devoted respectively to the income statement, balance sheet, and cash flow statement, i.e. the main 3 financial statements.

Then, there’s a module on various techniques used in accounting, followed by a number of modules elaborating on different financial statement items, e.g. inventories.

The last 2 modules are about quality and applications.

Where Real Difficulty Lies

The greatest difficulty about the topic of Financial Statement Analysis is probably not the content itself but rather the abundance of the information.

First of all, there are various differences and similarities to acquire. Take inventories. They are treated differently depending on whether they are reported under IFRS or U.S. GAAP. You can have it all cleared up with our IFRS vs U.S. GAAP e-book.

IFRS vs U.S. GAAP: E-book

Moreover, there are plenty of ratios to take in.

That's when another difficulty arises, namely data irrelevance. Very often, FSA questions contain lots of data, some of which are totally insignificant for solving the problem. If you do not know exactly what elements you need to calculate the appropriate ratio, you won’t be able to cope with the exam question.

Excessive data also means more challenging analysis. You have to be able to interpret the data you see and judge its impact on the problem you’re dealing with.

Finally, questions about relations between different elements are extremely frequent. To give an example, let’s think of a lease and the cash flow from operations and how the former can affect the latter:

How can a change from financing to operating lease affect the company’s cash flow from operations?

To be able to approach this kind of problems, you need to understand what a given change means and whether it has any important influence. If yes, then you need to know what it is that the change affects and how it affects it.

Why FSA Is So Crucial

Is Financial Statement Analysis the hardest topic of level 1 CFA exam?

It may be.

But it might be as well Fixed Income with its debt securities, Derivatives with its options or any other topic as a matter of fact. It’s an individual matter.

If, however, it proves for you to be FSA – do not surrender but find a way to overcome the difficulty. It’s definitely worth it because it’s one of the most important topics in your level 1 exam. Think about it this way: no effort spared on FSA is lost. The better you cope with the topic now, the greater the chances of success in your level 1 exam. Plus, it will surely pay off when the challenges of the level 2 exam get real.

When you set up your CFA exam study schedule, you'll be able to choose topics difficulty. For the topics you mark as difficult, you'll have more study time allotted. And for the topics you consider easy – you'll get relatively less time. If you mark no topic as difficult or easy, we'll allot our recommended study times to your topics and weeks (topics length and difficulty already factored in as evaluated by our expert). To get exact study hours for your CFA exam modules and study weeks, please go for our PAID PLAN .