Characteristics of Bonds – Series 7 Exam

🟦 Characteristics of Bonds – Series 7 Exam

Understanding the fundamental characteristics of bonds is crucial for the Series 7 exam. Bonds are debt securities issued by corporations, municipalities, or governments to raise capital, and they come with specific features that influence their investment appeal and risk profile.

📌 Key Bond Characteristics

1. Par Value (Face Value):
   • The amount the bondholder will receive at maturity, typically $1,000 per bond.app.achievable.me+2cdn.stcinteractive.com+2app.achievable.me+2
2. Coupon Rate:
   • The fixed annual interest rate paid by the issuer, expressed as a percentage of the par value. For example, a 5% coupon rate on a $1,000 bond yields $50 annually.
3. Maturity Date:
   • The date when the issuer repays the par value to the bondholder. Maturities can range from short-term (less than 1 year) to long-term (up to 30 years or more).cdn.stcinteractive.com
4. Yield:
   • The return an investor can expect to earn if the bond is held to maturity. Key yield measures include:
     • Current Yield: Annual coupon payment divided by the bond’s current market price.
     • Yield to Maturity (YTM): Total return anticipated if the bond is held until it matures.
     • Yield to Call (YTC): The yield assuming the bond is called (redeemed early) before maturity.
5. Price:
   • Bonds are quoted as a percentage of par value. For instance, a bond quoted at 98 is priced at $980. Prices fluctuate based on interest rates, credit ratings, and market conditions.cdn.stcinteractive.com
6. Credit Rating:
   • Assigned by agencies like Moody’s and Standard & Poor’s, ratings assess the issuer’s creditworthiness. Investment-grade bonds (e.g., AAA, AA) are considered lower risk, while lower-rated bonds (e.g., BB, B) are higher risk and offer higher yields.
7. Call and Put Features:
   • Callable Bonds: Issuer can redeem the bond before maturity, typically when interest rates decline.
   • Putable Bonds: Investor can sell the bond back to the issuer before maturity, usually when interest rates rise.
8. Convertible Bonds:
   • Can be converted into a predetermined number of the issuer’s equity shares. These bonds offer potential for capital appreciation if the company’s stock price increases.
9. Accrued Interest:
   • Interest that accumulates between coupon payments. When a bond is bought or sold between coupon dates, the buyer must pay the seller the accrued interest.
10. Tax Considerations:
    • Interest income from bonds may be subject to federal, state, and local taxes. Municipal bonds, however, often offer tax-exempt interest income at the federal level and sometimes at the state and local levels.

✅ Importance for the Series 7 Exam

A solid grasp of these bond characteristics is essential for the Series 7 exam, as they form the basis for understanding bond pricing, yield calculations, risk assessment, and suitability determinations for clients.

For a more in-depth exploration of bond fundamentals and their application in the Series 7 exam, consider reviewing the following resource: