2.2 Bond Yields & Pricing
Mastering the bond yield teeter-totter (seesaw) is mandatory for Series 7 candidates. You must instinctively rank Nominal Yield (NY), Current Yield (CY), Yield to Maturity (YTM), and Yield to Call (YTC) for discount and premium bonds.
Key FINRA Exam Takeaways
- Bond prices and interest rates move in opposite directions (inverse relationship).
- Current Yield (CY) = Annual Coupon Interest ÷ Current Market Price.
- Discount bond hierarchy (lowest to highest): Nominal < Current Yield < YTM < YTC.
- Premium bond hierarchy (lowest to highest): YTC < YTM < Current Yield < Nominal.
- Yield to Call (YTC) is the lowest yield on a premium bond (Yield to Worst).
The Bond Teeter-Totter (Yield Seesaw)
When a bond trades at Par: NY = CY = YTM = YTC. When trading at a Discount: the price is pulled down, tilting yields upward: NY < CY < YTM < YTC. When trading at a Premium: price is up, tilting yields downward: YTC < YTM < CY < NY.
Yield to Worst (MSRB / FINRA Confirmation Rule)
FINRA and MSRB rules require customer confirmations to state the lower of YTM or YTC (Yield to Worst). On premium callable bonds, YTC is always quoted; on discount callable bonds, YTM is quoted.
| Bond Pricing | Lowest Yield | Second | Third | Highest Yield | Quoted on Confirmation |
|---|---|---|---|---|---|
| Discount Bond | Nominal (Coupon) | Current Yield | Yield to Maturity | Yield to Call | Yield to Maturity (YTM) |
| Par Bond | All Equal | All Equal | All Equal | All Equal | Nominal / YTM |
| Premium Bond | Yield to Call | Yield to Maturity | Current Yield | Nominal (Coupon) | Yield to Call (YTC) |
A municipal bond with a 5% coupon is trading at a premium price of 106 ($1,060). Which of the following lists the bond's yields in order from LOWEST to HIGHEST?