Introduction
Welcome to Corporate Bonds: the foundation of fixed-income knowledge you need for the Series 7 exam.
Exam Weight: Part of Function 3 (73% of exam), with approximately 20 questions across the Debt Securities chapter
What You'll Learn
In this unit, you'll cover:
- Corporate Bond Fundamentals: Par value, coupon rates, interest payments, the bond indenture, key risks, and call provisions
- Types of Corporate Bonds: Secured vs. unsecured bonds, zero-coupon bonds, income bonds, step-up bonds, and high-yield (junk) bonds
- Convertible Bonds: Conversion ratios, parity price calculations, arbitrage, and forced conversion
- Bond Ratings: The three major rating agencies, investment grade vs. speculative grade, and what ratings actually measure
- Tax Treatment of Debt Securities: original issue discount (OID), phantom income, premium amortization, market discount, and capital gains
- Debt Securities and Money Market Instruments: Commercial paper, brokered certificates of deposit (CDs), Eurodollar bonds, and variable-rate preferreds
- Structured Products: Equity-linked notes and exchange-traded notes (ETNs)
- Non-U.S. Market Debt: Sovereign debt, foreign corporate debt, and Yankee bonds
- Types of Yields: Coupon yield, current yield, yield to maturity (YTM), yield to call (YTC), yield to worst, and the price-yield relationship
Why This Matters
Corporate bonds are one of the most frequently tested topics in the debt securities portion of the Series 7 exam. You need to understand:
- How bonds work mechanically
- How different bond types create different risk profiles
- How yields change when bonds trade at premiums or discounts
- How tax treatment varies depending on how and when a bond was purchased
The convertible bond calculations and yield relationships are especially popular exam topics.
Let's start with the fundamental building blocks of corporate bonds.