2.2 Fixed Income Securities Basics
Understanding bond yield relationships is fundamental. Series 66 questions frequently test the bond seesaw and the ranking of yields at a discount versus a premium.
Key NASAA Exam Takeaways
- Bond prices and market interest rates share an inverse relationship: when rates rise, prices fall.
- For discount bonds: Nominal Yield < Current Yield < Yield to Maturity (YTM) < Yield to Call (YTC).
- For premium bonds: Yield to Call (YTC) < Yield to Maturity (YTM) < Current Yield < Nominal Yield.
- Current Yield = Annual Coupon Payment in Dollars / Current Market Price.
Current Yield Calculation
An investor purchases a 6% corporate bond trading at 80 ($800 per bond). What is the current yield?
- Calculate annual dollar interest: 6% of $1,000 par value = $60.
- Divide by current market price: $60 / $800 = 0.075.
- Convert to percentage: 7.5%.
Result: Current Yield = 7.5% (higher than nominal yield of 6% because purchased at a discount).
Interactive Knowledge Checkpoint • Section 2.2
An investor purchases a corporate bond trading at a premium. Which of the following yields will be the lowest?