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Characteristics of Bonds – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
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📘 Characteristics of Bonds – Series 7 Exam Guide
Master the Fundamentals of Debt Securities for Exam Success
Understanding the characteristics of bonds is essential for passing the Series 7 Exam. Bonds are a core asset class in financial markets, and you’ll need to know how they function, how they’re valued, and how they’re structured to serve different investor needs.
🏦 What Is a Bond?
A bond is a debt instrument issued by a corporation, municipality, or government entity. When an investor buys a bond, they are lending money to the issuer in exchange for:
- Interest payments (typically semiannual)
- Repayment of principal at maturity
🔑 Key Characteristics to Know
| Characteristic | Description |
|---|---|
| Par Value | Typically $1,000; amount returned at maturity |
| Coupon Rate | Stated annual interest rate; paid semiannually unless stated otherwise |
| Maturity Date | When the issuer repays the principal |
| Issuer | Entity that borrows the funds (e.g., corporation, municipality, U.S. Treasury) |
| Yield | Investor’s return, based on purchase price and coupon |
| Price | Bonds are quoted as a percentage of par (e.g., 98 = $980) |
🧮 Types of Bond Yields
- Coupon Yield: Fixed rate on face value
- Current Yield (CY):
CY = Annual Interest ÷ Market Price - Yield to Maturity (YTM): Total return if held to maturity
- Yield to Call (YTC): Total return if called early
For premium bonds: Coupon > CY > YTM > YTC
For discount bonds: Coupon < CY < YTM < YTC
⚠️ Bond Risks to Know
| Risk Type | Description |
|---|---|
| Interest Rate Risk | Bond prices fall when interest rates rise |
| Credit/Default Risk | Issuer may not pay interest or principal |
| Inflation Risk | Purchasing power of interest payments erodes over time |
| Call Risk | Bonds may be called early, ending income stream sooner |
| Liquidity Risk | Infrequently traded bonds may be hard to sell at a fair price |
🔄 Other Important Features
- Callable Bonds: Can be redeemed early by issuer
- Convertible Bonds: Can be exchanged for stock
- Zero-Coupon Bonds: No interest payments, sold at a deep discount
- Secured Bonds: Backed by specific collateral
- Debentures: Unsecured corporate bonds backed only by issuer’s credit
📅 Bond Settlement and Accrued Interest
- Settlement: Corporate and muni bonds settle T+2
- Accrued Interest:
- Calculated on a 30/360 basis for corporate/muni bonds
- Actual/actual for Treasuries
- Buyer pays seller for interest earned between last payment and settlement
📘 Series 7 Exam Focus Areas
- Bond pricing and quotation
- Yield hierarchy and calculations
- Risk vs. return profiles
- Suitability questions based on client goals and bond types
- Accrued interest and trade settlement math
🎯 Study Smart. Pass with Confidence.
At finra-exam-mastery.com, we provide:
- Bond tutorials with visuals
- Interactive yield calculators
- Timed quizzes on bond features and risks
- Full-length Series 7 practice exams
Understand bond basics. Apply bond strategies. Pass the Series 7.