Corporate Bond Practice Questions for the SIE

Answer: $30

A bond's coupon (nominal yield) is always stated as a percentage of par value, not of the market price. Six percent of $1,000 par is $60 of annual interest, and because corporate bonds conventionally pay interest in two semiannual installments, each payment is $30. Choosing $60 confuses the annual total with a single payment; $15 assumes quarterly payments, which is not the standard corporate convention; $6 applies the 6% rate to the $100 quoting convention used for pricing rather than to the $1,000 par on which interest is computed. These are standard bond mechanics drawn from the debt-instruments portion of the FINRA SIE content outline.

The Trap: annual-vs-semiannual-coupon

• $15: Misconception: assumes quarterly payments; corporate bonds conventionally pay interest semiannually.
• $60: Misconception: confuses the ANNUAL interest ($60 = 6% of par) with a single payment, forgetting the standard corporate convention of two semiannual installments.
• $6: Misconception: applies the 6% rate to the $100 price-quote convention instead of the $1,000 par value on which coupon interest is actually computed.

Verified against: FINRA SIE Content Outline (debt instruments)

Answer: Above par, at a premium

Bond prices and market interest rates move inversely — the classic seesaw. When rates fall, an outstanding bond's fixed coupon is higher than what comparable new bonds offer, so buyers bid its price above par (a premium) until its yield falls in line with the market. Believing prices move in the same direction as rates reverses the seesaw. A fixed coupon fixes the dollar interest, not the price. And while the possibility of an early call can limit how far a callable bond rises above par, it does not push the price below the offering price when rates decline. This inverse relationship is among the most frequently tested concepts on the SIE.

The Trap: price-follows-rates

• At par, because the fixed coupon rate keeps the price fixed: Misconception: believes a fixed coupon locks the price; the coupon fixes only the dollar interest, while the market price adjusts to align the bond's yield with current rates.
• Below par, because bond prices move in the same direction as interest rates: Misconception: the same-direction error — bond prices and market rates move INVERSELY, the most heavily tested relationship in the debt section.
• Below their original offering price, because the likelihood of an early call pushes the price down: Misconception: misreads call risk — the possibility of a call caps how far a callable bond's price can rise above par (price compression); it does not drag the price below par when rates fall.

Verified against: Bond price/yield inverse relationship — standard fixed-income mechanics (general bond math, not a specific rule)

Answer: An unsecured bond backed only by the issuing corporation's full faith, credit, and general assets

A debenture is an unsecured corporate bond backed only by the issuer's full faith, credit, and general assets — no specific collateral is pledged. Unsecured does not mean low quality: a debenture from a financially strong company can be investment grade, while a secured bond from a weak issuer can be speculative, so equating 'debenture' with 'junk' is a classic trap. A bond secured by real estate is a mortgage bond, and one backed by securities of another entity held by a trustee is a collateral trust certificate. Corporate bonds of all these types are generally issued under an indenture with an independent trustee, a safeguard rooted in the Trust Indenture Act of 1939.

The Trap: debenture-equals-junk

• A bond backed by securities of another company held in trust as collateral: Misconception: describes a collateral trust certificate, which IS secured — by a portfolio of securities rather than physical property.
• A bond secured by a lien on real estate owned by the corporation: Misconception: describes a mortgage bond — a common mix-up between secured and unsecured corporate debt taxonomy.
• A bond rated below investment grade: Misconception: the 'debenture = junk' trap — unsecured describes the structure, not the quality; a strong issuer's debenture can be investment grade.

Verified against: 'debenture = junk' confusion)

Answer: Buying the bond at a deep discount and receiving full par value at maturity

A zero-coupon bond pays no periodic interest. It is bought at a deep discount and redeemed at full par at maturity, and that built-in accretion is the investor's entire return. A bond paying semiannual interest at a resetting rate describes an ordinary floating-rate note, and the right to sell back to the issuer describes a put feature — neither applies here. The 'tax-deferred annual payments' choice is doubly wrong: zeros make no annual payments, and for corporate zeros the accreted interest is generally taxable each year as it is earned even though no cash is received (so-called phantom income). Because there are no coupons, zeros also trade flat (no accrued interest) and are the most price-sensitive bonds when market rates move.

The Trap: zeros-pay-periodic-interest

• The right to sell the bond back to the issuer at a premium above par: Misconception: confuses a zero's built-in accretion with a put feature; puts are a separate contractual option and are typically exercisable at par.
• Annual interest payments that are tax-deferred until maturity: Misconception: doubly wrong — zeros make no annual payments, and the accreted interest on corporate zeros is generally taxed each year as phantom income, not deferred.
• Semiannual interest payments at a rate that resets with market conditions: Misconception: assumes every bond pays periodic coupons; a zero-coupon bond pays no interest along the way (and a resetting rate describes a floating-rate note).

Verified against: Zero-coupon bond discount-to-par accretion mechanics — standard fixed-income mechanics (general bond math, not a specific rule)

Answer: They trade at a discount, which raises the yield a new buyer earns to competitive levels

The 4% coupon is fixed for the life of the bond, so the only way the bond can compete with new 6% issues is for its price to fall. At a discount, the buyer earns the 4% coupon on a smaller investment plus the built-in gain as the bond accretes to par at maturity, pushing the overall yield up toward market levels. Trading at a premium reverses the relationship — a below-market coupon produces a discount, not a premium, and a bond's age adds no value by itself. A fixed coupon locks the dollar interest, not the price. And the stated coupon on a fixed-rate bond never resets with the market; the price is what adjusts. This is the price-yield seesaw applied to discount pricing, a core SIE debt concept.

The Trap: discount-premium-inversion

• Their coupon rate increases to 6% so existing holders keep pace with the market: Misconception: thinks the stated coupon adjusts to market rates; on a fixed-rate bond the coupon never changes — only the price does.
• They continue to trade at par, because the coupon rate is fixed for the life of the bond: Misconception: believes a fixed coupon locks the price; the coupon fixes only the dollar interest, and the price is what adjusts to market yields.
• They trade at a premium, because seasoned bonds are worth more than new issues: Misconception: inverts the discount/premium logic — a below-market coupon makes a bond LESS attractive, producing a discount; age alone adds no value.

Verified against: Bond discount pricing relative to prevailing market coupon rates — standard fixed-income mechanics (general bond math, not a specific rule)

Answer: 5%

A corporate bond quote of 120 means 120% of $1,000 par, or $1,200. Current yield = annual interest ÷ current market price = $60 ÷ $1,200 = 5%. Answering 6% divides the $60 by par instead of the price actually paid — that is the nominal (coupon) yield. Answering 7.2% adjusts the yield upward for the premium, reversing the fundamental rule that paying more for the same $60 of interest produces a lower yield; a premium bond's current yield is always below its coupon rate. Saying maturity is required confuses current yield with yield to maturity: the maturity date matters for YTM and YTC, but current yield needs only the annual interest and the market price.

The Trap: current-yield-on-par

• 6%: Misconception: divides annual interest by PAR instead of market price — that is the nominal (coupon) yield, not current yield.
• 7.2%: Misconception: adjusts the yield upward for the premium price (6% × 1.2), reversing the rule that paying more for the same dollar interest produces a LOWER yield.
• It cannot be determined without the bond's maturity date: Misconception: confuses current yield with yield to maturity — maturity is needed for YTM/YTC, but current yield requires only annual interest and market price.

Verified against: corporate quote conventions)

Answer: Nominal yield, current yield, yield to maturity, yield to call

At 92 the bond trades at a discount, and the discount hierarchy runs nominal < current yield < YTM < YTC. Current yield beats the nominal (coupon) rate because the same dollar interest is earned on a price below par. YTM is higher still because it adds the gain from the discount accreting to par at maturity. YTC is highest because an early call would deliver that gain over an even shorter period. Ranking YTC lowest is the premium-bond ordering — the mirror image, correct only for bonds above par. Placing YTM below current yield ignores the accretion gain that YTM captures. And the four measures are equal only in the special case of a bond trading exactly at par. Yield-ladder ranking questions like this are a staple of the SIE debt section.

The Trap: premium-ordering-on-discount-bond

• Yield to call, yield to maturity, current yield, nominal yield: Misconception: applies the PREMIUM-bond hierarchy to a discount bond — the exact mirror image of the correct ordering.
• Nominal yield, yield to maturity, current yield, yield to call: Misconception: garbles the middle of the ladder — on a discount bond YTM must exceed current yield because it adds the gain from the discount accreting to par.
• All four yields are equal because they measure the same bond: Misconception: overgeneralizes the special case — the yield measures converge only when a bond trades exactly at par.

Verified against: Discount-bond yield hierarchy (nominal < current yield < YTM < YTC) — standard fixed-income yield mechanics (general bond math, not a specific rule)

Answer: A 9% coupon bond callable at 102

Issuers typically call bonds when interest rates have fallen, allowing them to retire high-coupon debt and refinance at today's lower rates — the corporate equivalent of a homeowner refinancing a mortgage. The 9% callable bond offers the biggest interest savings, easily justifying the modest 102 call price. The 4% callable bond already costs less than new debt would, so calling it saves nothing. The 9% noncallable bond cannot be redeemed early no matter how appealing that would be — a call requires a call feature in the indenture. And a put feature belongs to the investor, not the issuer; holders exercise puts when rates rise, the mirror image of the issuer's call. Remember the pairing: issuers call when rates fall; investors put when rates rise.

The Trap: call-direction-confusion

• A 9% coupon bond with no call feature: Misconception: assumes any bond can be redeemed early; without a call feature the issuer generally cannot force redemption, however attractive that would be.
• A 4% coupon bond callable at par: Misconception: misses the refinancing motive — a coupon already below new-issue rates offers the issuer no savings, so there is no reason to call it.
• A 4% coupon bond with a put feature exercisable at par: Misconception: confuses the issuer's call with the investor's put — a put belongs to the bondholder and is typically exercised when rates RISE, the mirror scenario.

Verified against: Issuer call decision driven by falling interest rates — standard bond call-feature mechanics set in the bond's indenture (general market practice, not a specific rule)

Answer: Interest rates have risen and the bond's market price has fallen below par

A put feature is the bondholder's escape hatch. When market rates rise, the bond's price falls below par; the holder can put the bond back to the issuer at full par and reinvest the proceeds at the new, higher rates. Exercising when rates have fallen describes the conditions under which issuers call bonds — the famous mirror-image confusion; a holder whose bond trades above par would simply sell it in the market for more than par. A call is the issuer's option, not something the holder responds to with a put. And no put is needed at maturity, because the issuer pays par then anyway. Memory anchor: issuers call when rates fall; investors put when rates rise.

The Trap: put-call-mirror-confusion

• The issuer announces it is calling the bond: Misconception: mixes up whose option is whose — a call is the issuer's right and a put is the investor's; once a call is announced there is nothing left to put.
• The bond reaches its final maturity date: Misconception: thinks a put is how principal is recovered at maturity; at maturity the issuer pays par automatically, so the put is unnecessary.
• Interest rates have fallen and the bond is trading above par: Misconception: the call/put mirror confusion — falling rates are when ISSUERS call; a holder whose bond trades above par would sell at the market premium, not put at par.

Verified against: Bondholder put-option exercise driven by rising interest rates — standard bond put-feature mechanics (general market practice, not a specific rule)

Answer: 25 shares

Conversion ratio = par value ÷ conversion price = $1,000 ÷ $40 = 25 shares. The ratio is set in the bond's indenture and stays fixed (adjusting only for events such as stock splits); the stock's day-to-day market price determines whether converting is attractive — that comparison is called parity — not how many shares the holder receives. Choosing 40 mistakes the conversion price for the ratio itself. Choosing 2.5 divides a $100 par by the price, borrowing the preferred-stock convention when bonds carry $1,000 par. A related tested point: convertibles typically carry lower coupons than comparable nonconvertible debt because investors give up some yield in exchange for the conversion privilege.

The Trap: conversion-price-as-ratio

• 40 shares: Misconception: mistakes the $40 conversion PRICE for the conversion ratio — the two are related by the formula, not interchangeable.
• 2.5 shares: Misconception: divides a $100 par by the conversion price — the preferred-stock par convention; corporate bonds carry $1,000 par.
• It changes daily with the stock's market price: Misconception: confuses the fixed conversion ratio with parity — the market price determines whether converting is attractive, not how many shares are received.

Verified against: Convertible bond conversion ratio = par value ÷ conversion price — standard convertible bond mechanics (general bond math, not a specific rule)