A bond is a loan to the issuer: par (face) value — normally $1,000 — is repaid at maturity, and the coupon (nominal yield) is the fixed annual interest as a percentage of par, usually paid semiannually.
The exam tests bond structure through classification tells. A bond that “matures in installments over several dates” is serial (think municipals timing maturities to a project’s revenue); one where the entire principal comes due on a single date is a term bond; a combination is a serial-with-balloon issue — staggered maturities with a large final tranche. Watch the zero-coupon trap: a zero pays no periodic interest, so a buyer settles with no accrued interest, yet on taxable zeros the IRS taxes the annual accretion (OID) as phantom income each year even though no cash arrives — the classic “which bondholder owes tax before receiving cash” answer.
Don’t confuse fundamentals with the price–yield seesaw or yield-measure ordering — those are separate items; here the answer hinges on structure and definitions, not math. Also separate the indenture (issuer’s promises under the Trust Indenture Act of 1939, which requires a trustee for non-exempt corporate issues over $50 million) from the prospectus (the disclosure document). Memory hook: serial = staggered, term = together.
Bond prices and yields move inversely: when market interest rates rise, existing bond prices fall, and when rates fall, prices rise — the single most-tested relationship on the SIE.
The classic item gives you a scenario — “rates rise after a bond is issued” — and asks what happens to that bond’s price, or which of four bonds moves most. The answer always hinges on direction first (rates up = price down), then magnitude: for the same rate change, the bond with the longest maturity and lowest coupon swings hardest, so a long-term zero-coupon bond is the maximum-volatility answer and a short-term high-coupon bond the most stable. Watch for the “tell” that a bond now trades at a discount — that signals market rates have risen above its coupon (and a premium signals rates fell).
The trap is blurring price behavior with yield ordering: don’t confuse this seesaw with the yield-measure ranking (at a discount, YTC > YTM > current yield > nominal). Another miss is conflating price/interest-rate risk with reinvestment risk — the zero has the most price risk but no reinvestment risk on coupons, since it pays none. Memory hook: higher coupons act like a shock absorber, cushioning price swings.
Ways of expressing a bond's return: nominal yield (the fixed coupon), current yield (annual interest ÷ market price), yield to maturity (total return if held to maturity), and yield to call.
The classic item gives a coupon and a price and asks which yield is highest or lowest, or asks you to rank all four. The “tell” is the price relative to par: spot discount vs. premium first, then apply the ordering — you rarely compute anything. A second pattern feeds you the dollar coupon and price and wants current yield; the trap is grabbing the nominal figure, which divides by par, not market price. Note that “stated,” “coupon,” and “nominal” all name the same fixed rate set in the indenture.
The common miss is reversing the seesaw: on a premium bond YTC is the lowest yield because the issuer (refinancing as rates fall) redeems early, so you absorb the premium loss over a shorter horizon. Don’t confuse this with the inverse price–yield rule (rates up, prices down) — that’s about price movement, while yield measures rank one bond at a single price. Memory hook: the four yields fan out around the bond’s YTM, and an early call drags the worst-case yield toward the premium end.
Direct obligations of the U.S. government: T-bills (one year or less, sold at a discount), T-notes (2–10 years), T-bonds (over 10 years), TIPS (principal adjusts with CPI), and STRIPS (zero-coupon Treasuries).
The exam loves the tax mirror: Treasuries are taxed federally but exempt from state and local tax — the reverse of municipals, which are federal-exempt but generally state-taxable when issued by another state. So the “which security gives an in-state investor a state-tax break” trap answers in-state munis, not Treasuries. A second favorite is STRIPS versus TIPS as an inflation tool: a STRIP locks in one fixed nominal payout and throws off phantom income (the accreted discount is taxed yearly with no cash received), so it is a poor inflation hedge, whereas TIPS answer purchasing-power risk directly.
The classic mistake is reading “no credit risk” as “no risk.” Treasuries still carry full interest-rate and inflation risk — a long T-bond’s price swings hard when rates move, and the longer the duration the harder the swing. Memory hook: Bills are Brief, Notes are iN-between, Bonds go Beyond. (Some older question banks peg T-bonds at 20–30 years, the maturities currently auctioned.)
Debt of states, cities, and other political subdivisions; general obligation (GO) bonds are backed by taxing power, while revenue bonds are repaid from the earnings of a specific facility such as a toll road.
The classic item gives you an investor’s tax bracket and asks you to compare a muni yield to a corporate yield — the trap is comparing the stated yields directly. You must convert to a tax-equivalent yield, and the higher the bracket, the more the muni wins. A second favorite reverses the state/local angle: a muni is double or triple tax-exempt only for an in-state resident, the mirror image of Treasuries (federally taxable, state- and local-exempt). Don’t assume “tax-free” means all gains escape tax — sell above your cost and the capital gain is fully taxable (only the coupon interest is tax-advantaged).
Keep the GO-versus-revenue distinction crisp: GO bonds lean on taxing power and usually voter approval, revenue bonds on a specific project’s net revenues and a feasibility study, no vote needed. Confusing the disclosure regime is common — munis use an official statement, not a corporate-style prospectus or the bondholder contract called an indenture. Memory hook: “GO = Government’s pocketbook; revenue = the project pays its own way.”
Debt issued by corporations: secured bonds (mortgage bonds, equipment trust certificates) are backed by specific collateral; debentures are backed only by the issuer's credit; subordinated debentures rank below other debt.
Corporate interest is fully taxable at every level, so corporates must out-yield munis and Treasuries of similar maturity. Most exam misses come from the collateral tells: mortgage bonds pledge real property, equipment trust certificates pledge rolling stock (the railroad/airline staple), and collateral trust bonds pledge securities the issuer holds — match the name to its backing, and don’t reach for a secured type when the stem says “no specific asset pledged.” Two near-misses: guaranteed bonds lean on a third party (often a parent), which is a promise, not collateral, so they stay unsecured; and callable or convertible are embedded features layered on any bond, not security types.
Don’t confuse seniority with credit quality: liquidation rank reflects the claim, while coupon and yield reflect default risk, so a high-coupon junk debenture can still outrank a safer, lower-yield issue (see credit risk). Junior subordinated debentures stay above all equity, but a single dollar of unpaid wages and taxes is settled before any bondholder.
Callable bonds let the ISSUER redeem early — typically when rates fall — so they pay more yield and often include call protection; convertible bonds let the HOLDER exchange the bond for a set number of common shares.
The exam loves a two-step conversion calculation: take the conversion ratio, then find parity — the point where the bond and its underlying shares are worth the same. Using 25 shares, the bond is at parity when the stock reaches $40 (25 × $40 = $1,000 par); converted value at any moment is simply shares × current stock price. The other staple is yield ordering: on a callable trading at a premium, yield to call is the lowest yield, so it is the yield to worst a broker must quote (tie this to yield-measures).
Don’t read a callable’s higher coupon as strength — that extra yield is compensation for call risk and reinvestment risk (per bond-price-and-yield, falling rates lift prices but make a call more likely, forcing reinvestment at lower rates). Conversion, by contrast, is the holder’s option, exercised for equity upside. Even so, convertibles are usually unsecured debentures, and that equity feature doesn’t lift their creditor rank in the corporate-bonds liquidation order.
High-quality debt with one year or less to maturity: Treasury bills, commercial paper (corporate IOUs up to 270 days), negotiable (jumbo) CDs, banker's acceptances, and repurchase agreements.
The exam loves to make you sort instruments into the money market by maturity, so the reflex is “one year or less.” Watch the disguise: a 10-year T-bond with 9 months remaining IS now a money-market security — for an already-issued bond, remaining maturity, not original maturity, governs tradability (any government, muni, or corporate issue under a year trades here). The other classic pattern hands you a clue word and wants the product: “overnight loan collateralized by securities” = repurchase agreement, “unsecured corporate IOU” = commercial paper, “$100,000+ tradable bank deposit” = negotiable (jumbo) CD.
Among newly issued Treasuries only the T-bill is money-market; notes and bonds start as capital-market paper even though they’re equally liquid. And money-market ≠ risk-free: it’s low credit and low interest-rate risk, but not zero — unsecured commercial paper can default. Don’t confuse genuine money-market liquidity with illiquid alternatives like DPPs, which have no real secondary market. Memory hook: B-A finances “buy abroad.”
Letter grades from S&P, Moody's, and Fitch measuring default risk: BBB-/Baa3 and above are investment grade; anything below is high-yield (junk).
SIE questions usually hinge on the dividing line and scale direction: you’re handed a rating (BB+, Baa3, BBB-) and asked investment grade or junk. The “tell” is that lower letters mean higher risk and higher yield — the highest-coupon, safest-sounding bond is usually the riskiest. Watch for the trap where a bond is “downgraded from BBB- to BB+” — that crosses out of investment grade, so institutions mandated to hold investment grade are forced to sell (a “fallen angel”). And don’t mix rating systems: BBB-/BB+ are S&P/Fitch, while Baa3/Ba1 is the Moody’s equivalent — item-writers swap them to catch you.
Keep credit risk (nonsystematic/diversifiable — spread it across issuers) separate from interest-rate risk. Also separate a rating from seniority: ratings gauge default risk, not where a bond sits in the capital structure, so a low-rated secured bond can still recover ahead of a higher-rated unsecured one in liquidation. Hook: “Baa/BBB is the basement of investment grade — one step down is the junkyard.”