Debt Securities & Bonds

Bond Basics

• Bonds are debt instruments with par value, coupon rate, maturity date, and issuer credit risk. Bondholders are creditors, not owners.
• Price moves inversely to interest rates. Long maturities and low coupons create greater price volatility; this is interest-rate risk or duration sensitivity.
• Current yield = annual interest / market price. Yield to maturity includes annual interest plus gain or loss from accretion or amortization if held to maturity.

Corporate and Government Debt

• Secured corporate debt includes mortgage bonds; unsecured debt includes debentures. Subordinated debentures rank below senior debt in liquidation.
• Treasury securities are backed by the full faith and credit of the U.S. government. T-bills are discount securities with maturities up to 52 weeks and no periodic interest.
• Agency securities may carry direct backing, moral obligation, or only issuer credit support; know that GNMA has full faith and credit backing.

Pricing and Features

• Bond quotes are usually percent of par. A quote of 97.50 means 97.5% of par, or $975 on a $1,000 bond.
• Callable bonds expose investors to call risk and reinvestment risk when rates fall. Convertible bonds give holders upside participation in common stock.
• Discount bonds accrete to par; premium bonds amortize down to par by maturity if held.

Series 7 focus

• For tax and suitability questions, compare nominal yield, current yield, and after-tax yield. Tax-equivalent yield for a municipal bond = muni yield / (1 - tax bracket).
• Understand how credit downgrades affect price, yield spreads, and suitability for conservative clients.