SIE Bonds Basics
Updated October 27, 2026
Debt securities are a big part of Understanding Products and Their Risks, the largest part of the SIE (44%). Most bond questions come back to a few ideas: how price and yield move, what a bond’s rating means, and how different issuers’ bonds compare. Here’s what to know, followed by free practice questions.
The basics
- Par value: the face amount repaid at maturity, usually $1,000.
- Coupon (nominal yield): the fixed annual interest rate, as a percentage of par.
- Current yield: annual interest ÷ market price.
- Price and yield move in opposite directions. When market interest rates rise, existing bond prices fall.
| Bond trades at | Current yield compared with the coupon |
|---|---|
| A discount (below par) | Higher than the coupon |
| Par | Equal to the coupon |
| A premium (above par) | Lower than the coupon |
Ratings
Rating agencies such as Moody’s and S&P rate a bond’s credit quality. Bonds rated BBB (Baa) or higher are investment grade. Bonds rated below that are non-investment grade (high-yield, or “junk”), which pay more because their default risk is higher.
Types of issuers
| Issuer | Examples | Key point |
|---|---|---|
| U.S. Treasury | T-bills, T-notes, T-bonds | Backed by the full faith and credit of the U.S. government; interest is exempt from state and local tax |
| Corporations | Secured bonds, debentures | Debentures are unsecured, backed only by the issuer’s credit |
| Municipalities | General obligation and revenue bonds | Interest is generally exempt from federal income tax |
Risks
- Interest rate risk: prices fall when rates rise. Longer maturities are more sensitive.
- Credit (default) risk: the issuer may not pay.
- Call risk: the issuer may redeem the bond early, usually when rates fall.
- Inflation (purchasing power) risk: fixed payments lose value as prices rise.
Free SIE bond practice questions
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Market interest rates fall. What generally happens to the price of an existing fixed-rate bond?Answer: BBond prices and interest rates move in opposite directions. When rates fall, existing bonds with higher coupons become more valuable.
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A bond with a 5% coupon trades at 95 (below par). Its current yield is:Answer: CA bond trading at a discount has a current yield above its coupon: $50 ÷ $950 is about 5.26%.
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Which rating is the lowest that is still considered investment grade by S&P?Answer: DBBB (Baa at Moody's) is the lowest investment-grade rating. BB and below are non-investment grade.
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Interest on which bond is generally exempt from federal income tax?Answer: CInterest on most municipal bonds is exempt from federal income tax. Treasury interest is exempt from state and local tax instead.
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A debenture is:Answer: AA debenture is unsecured: it's backed only by the issuer's general credit, not by specific collateral.
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An issuer is most likely to call its bonds when:Answer: CWhen rates fall, an issuer can call its higher-coupon bonds and refinance at a lower rate. That's call risk for the investor.
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A zero-coupon bond:Answer: BA zero-coupon bond is sold at a deep discount and pays its full face value at maturity. Because there are no interim payments, its price is very sensitive to interest rate changes.
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Which U.S. Treasury security has a maturity of one year or less and is sold at a discount?Answer: CTreasury bills mature in one year or less and are issued at a discount. Notes mature in 2 to 10 years and bonds in 20 to 30 years.
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How is the principal of Treasury Inflation-Protected Securities (TIPS) adjusted?Answer: DThe principal of TIPS adjusts with the CPI, so interest payments (a fixed rate on the adjusted principal) rise with inflation.
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A general obligation (GO) municipal bond is backed by:Answer: AGO bonds are backed by the issuer's taxing power. Revenue bonds are repaid only from the revenue of the project they finance.
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How many basis points equal 1%?Answer: COne basis point is 0.01%, so 100 basis points equal 1%.
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When a bond trades between interest payment dates, who usually pays accrued interest?Answer: BThe buyer pays the seller the interest earned since the last payment date, because the buyer will receive the full next interest payment.
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Which bond is generally most sensitive to a change in interest rates?Answer: CLonger maturities and lower coupons make a bond's price more sensitive to rate changes. A long-term zero-coupon bond is the most sensitive of these.
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An investor worried that a high-coupon bond may be called away when rates fall is concerned about:Answer: DWhen rates fall, issuers may call high-coupon bonds, and the investor must reinvest the money at lower rates. This is call risk, a form of reinvestment risk.
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