Debt Securities: SIE Glossary Terms

By Reviewed by Michael Carter Updated

Verified against current FINRA & SEC rules.

Bond certificate with coupon stubs beside stacked coins, representing debt securities glossary terms

These 20 terms cover bonds: how they’re priced, how yield relates to price, and how government, municipal, and corporate paper differ. The load-bearing ideas are yield to maturity, the yield figure the exam asks you to rank against the others, the callable bond, which the issuer repays early when rates fall, and TIPS, the Treasury whose principal adjusts with inflation. If you can order the yields on a discount bond and a premium bond, half this cluster is done.

Par Value

Par value is the face amount of a bond ($1,000 unless stated otherwise) that the issuer borrows at issuance and repays at maturity. It is the anchor for nearly every bond number: coupon payments are calculated as a percentage of par, and prices are quoted as a percentage of par.

The SIE® keeps par-value questions simple and frequent. Three points carry almost all of them: bonds are issued and redeemed at par; a bond whose market price is above par trades at a premium; and one priced below par trades at a discount. Market price moves every day with interest rates, but par does not. The issuer repays $1,000 at maturity no matter what the bond traded for along the way.

Example: a corporate bond quoted at 102 costs $1,020 (102% of $1,000 par), so it trades at a premium. Quoted at 95, it costs $950, a discount. Either way, its 5% coupon rate still pays $50 a year, because the coupon is figured on par, not on the price you paid. The gap between the price paid and the par received back at maturity is what separates a bond’s current yield from its yield to maturity.

Practice it: corporate bonds practice questions

Coupon Rate

The coupon rate is the fixed annual interest a bond pays, stated as a percentage of its $1,000 par value. It is set when the bond is issued and does not change over the bond’s life, which is why it is also called the nominal yield.

The SIE® tests one idea about the coupon rate from several angles: it is fixed. A bond’s market price can rise or fall every day, but the dollar interest keeps arriving on the same schedule. Questions often tempt you to recalculate the coupon using the market price. That calculation produces current yield, a different measure. Also know the payment mechanics: most bonds pay the coupon in two equal semiannual installments.

Example: a bond with a 6% coupon pays $60 a year, $30 every six months. If rising interest rates push its price down to $900, it still pays $60. If falling rates lift the price to $1,100, still $60. The coupon is 6% of par value, not 6% of whatever the bond last traded for.

One more angle: because the payment is fixed, the bond’s price is what adjusts when prevailing rates change; prices fall as rates rise and rise as rates fall. That inverse relationship sits underneath most yield questions on the exam.

Practice it: corporate bonds practice questions

Current Yield

Current yield is a bond’s annual coupon payment divided by its current market price. It measures the income return an investor earns at today’s price, ignoring any gain or loss when the bond matures.

Current yield is one of the few calculations the SIE® asks you to perform outright. The formula is annual interest ÷ market price. The second tested point is the seesaw: when a bond’s price falls, its current yield rises, and when the price rises, current yield falls. The coupon rate in the numerator stays fixed; only the price in the denominator moves.

Example: a bond with a 6% coupon pays $60 a year. At a market price of $900, current yield is $60 ÷ $900 = 6.7%. At $1,100, it is $60 ÷ $1,100 = 5.5%. At exactly par, current yield equals the coupon rate, 6%.

Current yield’s position also matters in yield-ordering questions. On a discount bond, it sits above the coupon but below yield to maturity, because yield to maturity also counts the gain from the discounted price up to par. On a premium bond the order flips: current yield falls below the coupon but stays above yield to maturity.

Practice it: corporate bonds practice questions

Yield to Maturity

Yield to maturity (YTM) is the total annual return an investor earns by holding a bond until it matures, counting every coupon payment plus the gain or loss between the purchase price and the $1,000 par repaid at maturity.

The SIE® does not ask you to compute YTM (the math takes a financial calculator) but it tests the concept and, above all, the yield ordering. On a discount bond, YTM is the highest of the three yields: coupon rate < current yield < YTM, because YTM adds the built-in gain from the discounted price up to par. On a premium bond the order reverses: YTM < current yield < coupon rate, because the premium paid melts away by maturity. At par, all three are equal.

Example: a 5% coupon bond bought at $900 pays $50 a year, a current yield of 5.6%, and also delivers a $100 gain when it matures at $1,000. YTM captures both pieces, so it is higher than 5.6%. Buy the same bond at $1,100 instead, and the $100 loss at maturity pulls YTM below both the current yield and the coupon.

If the bond is callable, one more yield enters the picture, yield to call, which on a premium bond is lower still.

Practice it: corporate bonds practice questions

Yield to Call

Yield to call (YTC) is the annual return an investor earns if a callable bond is redeemed by the issuer at the first call date rather than held to maturity. It is figured the same way as yield to maturity, except the timeline stops at the call date and the payoff is the call price.

On the SIE®, yield to call shows up in one dependable spot: it is the lowest possible yield, the yield to worst, on a callable bond trading at a premium. The logic: a premium bond loses its premium by the time it is redeemed, and a call compresses that loss into fewer years, dragging the annualized return down. The full premium-bond ordering runs YTC < YTM < current yield < coupon rate.

Example: an investor pays $1,050 for a 6% bond callable at par ($1,000) in five years and maturing in twenty. Held to maturity, the $50 premium erodes over twenty years. Called in year five, the same $50 disappears in five years, a much larger annual drag, so YTC sits below yield to maturity.

One related test point: when a question asks which yield must be shown on a customer’s confirmation for a premium callable bond, the answer is the lower of YTM or YTC, the yield to worst.

Practice it: corporate bonds practice questions

Callable Bond

A callable bond gives the issuer the right to repay the bond before maturity, at a stated call price, once an initial call-protection period ends. The issuer holds the option; the investor bears the risk.

The SIE® tests the when and the why. Issuers call bonds when interest rates fall, retiring old high-coupon debt and borrowing again at the new lower rate, the corporate version of refinancing a mortgage. That timing is exactly what makes a call painful for the investor: the bond disappears at the moment its coupon is most valuable, and the returned principal can only be reinvested at the new, lower rates. Those are the twin exam answers: call risk and reinvestment risk. In exchange, callable bonds compensate investors three ways: a higher coupon rate than a comparable non-callable bond, a call-protection period during which the bond cannot be called, and often a call price slightly above par (a call premium).

Example: a company issued 7% bonds when rates were high. Rates fall to 5%, so once the five-year call protection ends, the issuer calls the bonds at 102 ($1,020). The investor pockets a small premium but now faces reinvesting at 5%. The return an investor earns if that happens at the first opportunity is the yield to call.

Practice it: corporate bonds practice questions

Convertible Bond

A convertible bond is a corporate bond the holder can exchange for a fixed number of shares of the issuer’s common stock. It behaves like a bond with a stock option attached: steady interest, plus a share of the upside if the stock climbs.

The SIE® tests three linked numbers. The conversion price is the stock price at which the exchange is set. The conversion ratio is how many shares one bond converts into: $1,000 par value ÷ conversion price. Parity is what the bond is worth purely as stock: conversion ratio × current market price of the stock. The exam also tests the trade-off: because the conversion feature has value, convertibles carry a lower coupon than comparable non-convertible bonds. The investor gives up income for equity upside.

Example: a convertible bond has a $40 conversion price. Conversion ratio = $1,000 ÷ $40 = 25 shares. With the stock trading at $44, parity = 25 × $44 = $1,100. A question may show the bond trading below $1,100 and ask what an investor could do (buy the bond, convert, and sell the shares at a profit) or simply ask you to produce the ratio or parity figure.

Most convertibles are issued as unsecured bonds, so their credit standing follows the debenture rules in a liquidation.

Practice it: corporate bonds practice questions

Debenture

A debenture is an unsecured corporate bond backed only by the issuer’s full faith and credit, its general promise and ability to pay, rather than by any specific collateral. Debenture holders are general creditors of the corporation.

The SIE® tests debentures mainly through the liquidation ladder. When a corporation is liquidated, claims are paid in order: secured creditors first (mortgage bondholders, equipment trust certificate holders), then general creditors including debenture holders, then subordinated debenture holders, then preferred stockholders, and common stockholders last. Two takeaways carry most questions: a debenture ranks below any secured bond of the same issuer, and it ranks ahead of subordinated debentures and every class of stock. Because no collateral stands behind it, a debenture’s quality rests on the issuer’s credit rating, and it generally pays a higher coupon than the same issuer’s secured debt.

Example: a company fails owing mortgage bondholders, debenture holders, and subordinated debenture holders, with preferred and common stockholders behind them all. The mortgage bondholders are paid from the pledged property first; whatever remains goes to debenture holders before the subordinated holders or any stockholder receives a dollar.

Many convertible bonds are structured as debentures, and like most corporate debt a debenture can also be issued as a callable bond.

Practice it: corporate bonds practice questions

Zero-Coupon Bond

A zero-coupon bond pays no periodic interest; it is bought at a deep discount and redeemed at $1,000 par at maturity, with the difference between the two serving as the investor’s entire return.

The SIE® tests three traits, and each one follows from the missing coupon. First, no reinvestment risk: with no interest payments to reinvest, the yield locked in at purchase is the yield received, which makes zeros a common choice for funding a known future goal, such as college tuition. Second, maximum price volatility: because every dollar arrives at maturity, a zero’s price swings more with interest-rate changes than a coupon bond of the same maturity. Third, phantom income: the annual accretion, the yearly climb from the discounted cost toward par, is taxed as interest income each year even though the investor receives no cash until maturity. Corporate and Treasury zeros (STRIPS) generate this taxable phantom income; municipal zeros accrete free of federal tax.

Example: an investor pays $600 for a zero maturing at $1,000 par value in ten years. She collects nothing along the way and $1,000 at the end, a $400 return, but reports a slice of that $400 as taxable interest every year she holds the bond.

At the short end of the market, a Treasury bill works the same way: sold at a discount, no coupon.

Practice it: corporate bonds practice questions

Treasury Bill (T-Bill)

A Treasury bill (T-bill) is a short-term debt obligation of the U.S. government that matures in 52 weeks or less, pays no coupon, and is issued and quoted at a discount from par. The investor’s interest is the difference between the discounted purchase price and the par amount received at maturity.

The SIE® tests the three facts packed into that definition. Maturity: one year or less (common terms run from 4 to 52 weeks) making T-bills the shortest-term Treasury security and a core money market instrument. Interest: none is paid along the way; like a zero-coupon bond, a T-bill is bought below par and redeemed at face value. Quoting: T-bills are quoted on a discount-yield basis rather than as a dollar price, the only Treasury security quoted this way. Because they carry the direct backing of the U.S. government and mature quickly, T-bills are treated as essentially free of default risk, and the 13-week bill serves as the standard proxy for the risk-free rate in exam questions.

Example: an investor buys a 26-week T-bill for $980 and receives $1,000 par value at maturity. The $20 difference is her interest, taxable at the federal level but exempt from state and local income tax, like all Treasury interest.

Practice it: government debt practice questions

STRIPS

STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon Treasury securities created when a dealer separates a Treasury bond’s interest coupons from its principal and sells each piece individually at a discount from face value.

The SIE® tests three things about STRIPS. First, they pay no periodic interest: you buy at a deep discount and receive full face value at maturity, so there is no reinvestment risk, because there are no coupons to reinvest at uncertain future rates. Second, the yearly increase in value, called accretion, is taxed as interest income each year even though no cash arrives until maturity, the classic phantom income fact. Third, they are backed by the full faith and credit of the U.S. government, so default is not the concern; price volatility is. A zero-coupon bond’s duration equals its maturity, which makes long-term STRIPS the most interest-rate-sensitive Treasuries.

Example: you pay $6,800 today for a STRIP with a $10,000 face amount maturing in ten years. The $3,200 difference is your interest, accreted, and taxed, a piece at a time across the ten years.

Because of the annual tax bill with no cash flow, STRIPS fit best in tax-deferred accounts such as IRAs, a pairing the exam rewards. Contrast them with TIPS, which adjust principal for inflation instead.

Practice it: government-debt practice questions

GNMA (Ginnie Mae)

GNMA (the Government National Mortgage Association, or Ginnie Mae) issues mortgage-backed pass-through certificates that are the only agency securities backed by the full faith and credit of the U.S. government.

The SIE® tests GNMA on three distinctions. First, the guarantee: Ginnie Mae carries the government’s direct backing, while FNMA (Fannie Mae) and FHLMC (Freddie Mac) do not: their securities have only an implied government connection. Second, the cash flow: a pool of home mortgages passes payments through to investors monthly, not semiannually, and each payment is part interest and part principal. Third, the risk: prepayment. When interest rates fall, homeowners refinance, principal comes back early, and investors must reinvest at the new lower rates, so GNMAs suffer in exactly the falling-rate environment that helps ordinary bonds.

Example: an investor holds a GNMA pass-through built from 30-year mortgages written at 7%. Rates drop to 5%, refinancing accelerates, and the certificate returns principal years ahead of schedule, right when 5% is the best reinvestment rate available.

One more testable fact: unlike interest on Treasuries and STRIPS, which escapes state and local tax, GNMA interest is fully taxable at the federal, state, and local levels.

Practice it: government-debt practice questions

General Obligation Bond

A general obligation (GO) bond is a municipal bond backed by the full faith, credit, and taxing power of the issuer, repaid from tax revenues rather than from any single project’s income.

The SIE® tests GO bonds as one half of a paired concept: the other half is the revenue bond, and most questions turn on three contrasts. Backing: GO bonds are supported by taxes; local issuers lean on ad valorem property taxes, while states lean on income and sales taxes. Approval: because they commit taxpayer money, GO issues typically require voter approval and are subject to statutory debt limits. Analysis: an analyst judging a GO bond studies the strength of the tax base: property values, population trends, the diversity of the local economy, and the issuer’s total outstanding debt. A shrinking tax base weakens the bond even if no project ever fails.

Example: a school district asks voters to approve a $50 million GO issue for new buildings. The measure passes, and debt service is paid from property tax collections across the district: every taxpayer stands behind the debt.

As with most municipal bonds, GO interest is generally exempt from federal income tax, which is why investors in higher tax brackets accept their lower stated yields.

Practice it: municipal-bonds practice questions

Revenue Bond

A revenue bond is a municipal bond repaid solely from the user fees and other income of a specific facility (a toll road, airport, water system, or stadium) rather than from taxes.

The SIE® tests revenue bonds by contrast with general obligation bonds, and three differences do most of the work. Backing: users pay, not taxpayers, so the bond is only as strong as the facility’s earnings. Approval: no voter approval is needed, and revenue bonds are not bound by statutory debt limits, which is why an issuer at its GO debt ceiling can still finance a project this way. Analysis: instead of studying a tax base, analysts read a feasibility study projecting whether the facility will earn enough to cover debt service, plus the protective covenants in the trust indenture, such as a rate covenant, the issuer’s promise to keep user fees high enough to pay bondholders.

Example: a state authority issues $100 million of toll-road revenue bonds. The feasibility study projects $20 million in annual tolls against $10 million of annual debt service, a 2-to-1 debt service coverage ratio, the kind of cushion analysts look for.

Because only the facility stands behind the debt, revenue bonds generally yield more than GO bonds from the same issuer.

Practice it: municipal-bonds practice questions

Commercial Paper

Commercial paper is an unsecured short-term promissory note issued by a corporation, sold at a discount from face value, with a maximum maturity of 270 days.

The SIE® tests the number first: 270 days. Paper issued with a maturity of 270 days or less is exempt from registration under the Securities Act of 1933, which is precisely why issuers stay under that ceiling: most paper actually matures in 30 to 90 days. Two more attributes carry questions. Unsecured: no collateral backs the note, so only corporations with strong credit can sell it, mostly to institutions and money market funds, to finance short-term needs like accounts receivable and seasonal inventory. Discount pricing: like Treasury bills, commercial paper pays no coupon; the return is the difference between the discounted purchase price and the face value collected at maturity.

Example: a finance company sells $1,000,000 face amount of 90-day paper for $990,000. The buyer collects $1,000,000 at maturity; the $10,000 difference is the interest.

Keep it separate from the banker’s acceptance, the other discount instrument in the money market: commercial paper funds a corporation’s general short-term needs, while a banker’s acceptance finances a specific import or export transaction and carries a bank’s guarantee.

Practice it: money-market practice questions

Banker's Acceptance

A banker’s acceptance (BA) is a short-term time draft that a bank has “accepted”, guaranteed, making it a money market instrument used chiefly to finance imports and exports.

The SIE® tests the BA almost as a matching exercise: when a question asks which instrument facilitates foreign trade, the banker’s acceptance is the answer. The mechanics explain why. An importer’s bank stamps a time draft “accepted,” substituting the bank’s credit for the importer’s. The exporter, now holding a bank-guaranteed IOU, does not have to wait for the payment date. It can sell the BA in the money market at a discount and get paid immediately. Whoever holds the BA at maturity collects face value from the bank. Like commercial paper and Treasury bills, BAs pay no coupon; the discount is the return. Maturities run up to 270 days, commonly 30 to 180.

Example: a U.S. electronics importer owes a Japanese supplier $500,000 payable in 90 days. The importer’s bank accepts the draft; the supplier sells the BA today for $494,000 rather than waiting, and the buyer of the BA collects the full $500,000 from the bank in 90 days.

Compare commercial paper, which is also sold at a discount but is unsecured and funds general corporate needs, not specific trade deals.

Practice it: money-market practice questions

Accrued Interest

Accrued interest is the interest a bond buyer pays the seller on top of the price, covering the days from the last coupon payment up to but not including the settlement date.

Bonds pay interest twice a year, but they change hands every day in between. Whoever owns the bond on a coupon date collects the full six months of interest, so the buyer compensates the seller for the days the seller held it. The SIE® tests two mechanics. The counting rule: accrue from the last payment date up to, but not including, settlement, and regular-way settlement is T+1. The day-count convention: corporate and municipal bonds use 30/360 (every month counts as 30 days, the year as 360), while U.S. government notes and bonds use actual calendar days over the actual days in the period.

Example: a corporate bond pays 6%, $60 a year, each January 1 and July 1. A trade settles March 16. Accrued days: 30 (January) + 30 (February) + 15 (March 1 through March 15) = 75 days. Accrued interest = $60 × 75/360 = $12.50, added to the buyer’s cost.

One exception worth memorizing: zero-coupon bonds such as STRIPS trade flat, without accrued interest, because there are no coupons to accrue.

Practice it: corporate-bonds practice questions

Duration

Duration measures how sensitive a bond’s price is to a change in interest rates: the higher the duration, the more the price moves when rates move.

The SIE® tests duration as a ranking exercise more than a calculation. Two drivers set the ranking. Maturity: the longer the bond, the higher its duration, because more of its cash arrives far in the future. Coupon: the lower the coupon, the higher the duration, because less cash comes back early. Put both together and the most volatile bond on any answer list is the long-term, low-coupon (or zero-coupon) bond; the most stable is the short-term, high-coupon bond. A zero-coupon bond such as a Treasury STRIP has a duration equal to its maturity, the maximum possible, which is why long zeros swing hardest of all.

The working approximation: a bond’s price changes about 1% for each year of duration when rates move one percentage point. Example: a bond with a duration of 8 falls roughly 8% if rates rise from 4% to 5%, and gains roughly 8% if rates fall by the same amount. A duration-2 bond moves only about 2% on the same rate change.

Duration describes interest-rate risk only; it says nothing about default. That is what credit ratings and the investment grade cutoff measure.

Practice it: investment-risks practice questions

Investment Grade

Investment grade describes a bond rated BBB- or higher by Standard & Poor’s (Baa3 or higher by Moody’s), meaning the rating agencies judge its risk of default to be relatively low.

The SIE® tests the cutoff line more than anything else: BBB/Baa is the lowest investment-grade tier. One notch below (BB+ at S&P, Ba1 at Moody’s) and the bond is speculative, better known as high yield or junk. Know what the scales measure: credit ratings assess default risk, the chance the issuer fails to pay interest or principal on time. They say nothing about price swings from rate moves: that is duration’s territory. Know the scale order too: S&P runs AAA, AA, A, BBB and on down to D; Moody’s runs Aaa, Aa, A, Baa and on down to C. Higher rating means lower default risk and a lower yield, because investors demand extra yield to hold weaker credits.

Example: an issuer’s bonds are rated BBB-, the last rung of investment grade. A downgrade to BB+ makes them a “fallen angel”, newly junk. Many institutions may hold only investment-grade paper, so forced selling pushes the price down and the yield up.

The scales apply beyond corporates: municipal issues such as revenue bonds carry the same letter grades.

Practice it: corporate-bonds practice questions

Drill these terms

When the definitions feel solid, drill them with corporate bonds practice questions, government debt practice questions, and municipal bonds practice questions, or browse the full SIE exam glossary.

Debt pairs with equity securities for the other core product type the exam tests, funds & packaged products for how bonds get pooled into a fund, and trading, markets & economy for how interest rates and the yield curve move bond prices. Practice this cluster’s mechanics with the Section 2 practice questions.

Related pages

Terms with their own page in this cluster

Every Debt Securities term below is defined in full on its own page, with the exam angle and a worked example.

The other SIE glossary clusters

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