SIE Fixed Income • What You Need to Know

A clean, exam-focused summary: types of debt securities, pricing & yields, ratings, features (call/convertible), basic offering methods (auction/competitive/negotiated), and the main risk types students must recognize.

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Core Notes (Read like a checklist)

Open each section. Everything here is “SIE-level”: definition + intuition + common traps.
1) Bond Basics (the language) must know
  • Bond = debt. Investor is the lender; issuer is the borrower. Coupon = interest.
  • Par (face) value: principal repaid at maturity (often $1,000 for corporates/munis; Treasuries quoted per $100).
  • Coupon rate: stated interest rate × par. Coupon payments are commonly semiannual for many U.S. bonds.
  • Maturity: date principal is due back. Longer maturity generally ⇒ more interest rate sensitivity.
  • Indenture: legal contract; may include covenants. Trustee helps represent bondholder interests.
Vocabulary quick map:
coupon = stated interest rate • par = face/principal • issuer = borrower • bondholder = lender
2) Price–Yield Relationship (the #1 rule) test favorite
  • Prices and yields move inversely. Rates ↑ ⇒ existing bond prices ↓. Rates ↓ ⇒ prices ↑.
  • Premium vs discount:
    • If coupon > YTM ⇒ bond tends to trade at a premium.
    • If coupon < YTM ⇒ bond tends to trade at a discount.
  • Duration intuition: Longer maturity and lower coupon generally ⇒ more price sensitivity to rate changes.
  • Basis point (bp): 1 bp = 0.01%. (So 50 bp = 0.50%.)
Fast exam shortcut: If the question says “rates rose,” your first thought should be: bond prices fall (unless the bond has a special feature like floating rate).
3) Yield Measures (what each one means) definitions
  • Coupon rate: interest based on par (does not change with price).
  • Current yield (quick estimate): annual coupon $ / current price.
  • YTM (yield to maturity): the “overall” annualized return if you buy at today’s price and hold to maturity (conceptually, it’s the discount rate that sets PV of cash flows = price).
  • YTC (yield to call): like YTM, but assumes the bond is called on the call date.
  • Total return: coupon income + price change (and for real life, reinvestment effects).
Mini drill: Price = $960, annual coupon = $60 ⇒ current yield ≈ 60/960 = 6.25%.
Current yield is not the same as YTM (YTM also considers getting par back and time value).
4) Bond Features (call, put, convertible, floating) features
  • Callable: issuer can redeem early (often when rates fall). Investors face call risk and reinvestment risk.
  • Putable: investor can sell back early (more protection ⇒ often lower yield).
  • Convertible: can convert into stock (equity-like upside; usually lower coupon than similar nonconvertible bonds).
  • Floating-rate note (FRN): coupon resets with a reference rate ⇒ typically less interest rate price risk than fixed-rate bonds.
Common trap: When rates fall, callable bonds are more likely to be called, so the investor loses the chance to keep earning the higher coupon.
5) Credit Risk, Ratings, and Priority of Claims risk + ratings
  • Credit (default) risk: probability issuer cannot pay interest/principal.
  • Ratings summarize credit quality; investment grade is generally BBB-/Baa3 and above; below that is commonly “high yield.”
  • Priority in bankruptcy (simplified):
    • Secured debt (collateral) tends to have higher claim than unsecured.
    • Senior tends to be paid before subordinated.
    • Preferred stock tends to be ahead of common stock.
Exam intuition: Higher credit risk ⇒ investors demand higher yield (all else equal).
6) Types of Debt Securities (what belongs in each bucket) products
  • U.S. Treasuries: bills (short), notes (medium), bonds (long). Often seen as lowest credit risk.
  • Agencies / agency-related: may include mortgage-backed and asset-backed structures; can have prepayment risk.
  • Corporate bonds: issued by firms; can be secured/unsecured, senior/subordinated, callable, convertible, etc.
  • Municipal securities (munis):
    • GO bonds: supported by taxing power.
    • Revenue bonds: supported by project revenues (tolls, utilities, etc.).
    • Some munis are taxable (don’t assume “all munis are always tax-free”).
  • Money market instruments: short-term instruments like CDs, bankers’ acceptances, commercial paper.
Quick sorting rule: If maturity is “very short” and it’s used for cash management, it’s often treated as a money-market type instrument.
7) Taxes (just what SIE expects) tax basics
  • Corporate interest is generally taxable as ordinary income.
  • Municipal interest is often exempt from federal income tax; state/local treatment can depend on residency and the bond.
  • Capital gains (selling above your purchase price) are generally taxable.
  • Tax-equivalent yield concept:
    TEY ≈ muni yield / (1 − tax rate)
    Example: muni 4% and tax rate 24% ⇒ TEY ≈ 0.04 / 0.76 ≈ 5.26%
Trap: “Tax-free” doesn’t always mean tax-free for every investor in every state.
8) Quotes, Accrued Interest, and Settlement (how to read pricing) mechanics
  • Clean price = quoted price (typically excludes accrued interest).
  • Dirty price = amount paid at settlement = clean price + accrued interest.
  • Treasury quotes often use 32nds:
    • 101-08 = 101 + 8/32 = 101.25 (per $100 of par).
    • A + sometimes means an extra 1/64.
  • Settlement timing: most U.S. securities use T+1 standard settlement (next business day) under current rules; some products/trades can differ by convention.
Accrued interest intuition: If you buy between coupon dates, you “reimburse” the seller for the interest they earned since the last coupon date. Then you get the full coupon on the next payment date.
9) Yield Curve (what shapes usually suggest) macro
  • Normal (upward sloping): longer maturities have higher yields (time + uncertainty).
  • Flat: similar yields across maturities (uncertainty/transition).
  • Inverted: short-term yields above long-term yields; often interpreted as expectations of lower future rates / weaker growth (signal, not guarantee).
One-liner: The yield curve is a picture of yields across maturities.
10) Issuance & Offerings (auction vs negotiated vs competitive) primary market
  • Primary market = new issue sold by issuer (often through underwriters/syndicates).
  • Auction is commonly associated with Treasury issuance (competitive/noncompetitive bidding ideas show up in many curricula).
  • Competitive vs negotiated offerings: two common ways securities are sold, especially in municipal finance contexts.
Exam focus: You don’t need deep underwriting math — just know the vocabulary and the “who does what.”
11) The Big Risk List (recognize which risk is being tested) risks
  • Interest rate risk: rates change ⇒ prices change (most important for fixed-rate bonds).
  • Reinvestment risk: coupon/principal may be reinvested at lower rates (common with callable bonds).
  • Credit risk: issuer may default / downgrade risk.
  • Inflation (purchasing power) risk: inflation erodes real returns (TIPS helps address this).
  • Liquidity risk: hard to sell quickly without price concession.
  • Prepayment risk: especially for mortgage-backed structures: borrowers refinance when rates fall.
Fast matching: “Rates fell and the bond got called” ⇒ reinvestment/call risk. “Rates rose and price fell” ⇒ interest rate risk.
12) High-Frequency Exam Traps (read these twice) traps
  • Premium/discount logic: coupon vs market yield (not “good/bad bond”).
  • Callable bond when rates fall: price upside is capped; call likelihood rises.
  • YTM vs current yield: current yield is quick; YTM is “overall hold-to-maturity” concept.
  • Munis: often federal tax-exempt, but not always across all taxes and situations.
  • Quotes: Treasuries in 32nds; corporates/munis often as % of par. Don’t mix up “per $100” vs “per $1,000.”
Practice technique: After you choose an answer, force yourself to say why each wrong choice is wrong in one sentence.