2.5 Bond Basics & Pricing
Bonds represent legal debt obligations. The inverse relationship between prevailing interest rates and bond market prices is central to SIE fixed income questions.
Key FINRA Exam Takeaways
- Bonds are creditor debt instruments with a standard par value of $1,000.
- Coupon (Nominal Yield): Fixed annual interest rate paid semiannually (e.g. 5% = $50/yr or $25 every 6 months).
- Bond Quotes: Quoted as a percentage of par (e.g., quote of 96 = $960; quote of 104 = $1,040).
- Inverse Relationship: Bond prices and interest rates move in OPPOSITE directions.
- Credit Ratings: BBB-/Baa3 and above is Investment Grade; BB+/Ba1 and below is High Yield / Junk.
Knowledge Checkpoint • Section 2.5
A corporate bond with a 6% coupon is currently quoted in the market at 92. What is the annual dollar interest paid to the bondholder, and what is the current market purchase price?