Introduction

Welcome to Debt Yields and Pricing: the unit that teaches you how to measure, compare, and calculate the return on bond investments.

Exam Weight: Part of F3 73% (~20 questions est. for debt chapter)

What You'll Learn

In this unit, you'll cover:

• Types of Bond Yields: Nominal yield, current yield, yield to maturity, yield to call, yield to worst, and discount yield; what each measures and when to use it
• Bond Pricing and the Price-Yield Relationship: How interest rates drive bond prices, discount vs. premium bonds, price sensitivity factors, and quoting conventions
• Accrued Interest: How interest is split between buyer and seller at settlement, day-count conventions, and bonds that trade flat
• Bond Ratings: The three major rating agencies, the investment-grade dividing line, and how rating changes affect price and yield
• Tax Implications of Taxable Debt Securities: Original Issue Discount (OID), market discount, bond premium amortization, and capital gains treatment
• Relationship of Bond Prices to Changes in Maturity and Coupon: Pull to par, duration concepts, and how maturity and coupon rate determine volatility

Why This Matters

Yield is the language of the bond market. Every bond recommendation, comparison, and suitability determination starts with understanding how to measure return. The Series 7 exam tests yield calculations, the yield hierarchy for discount and premium bonds, accrued interest mechanics, and the tax consequences of buying bonds above or below par. These concepts tie directly into municipal securities analysis (the next unit) and appear throughout options and portfolio theory questions as well.

Let's start with the six types of bond yields and how they compare.