Series 7 Exam: Types of Bond Certificates - dummies

Series 7 Exam: Types of Bond Certificates

By Steven M. Rice

To make your life interesting while preparing for the Series 7 exam, bond certificates can be delivered in different forms. Even though some types of bonds are no longer being issued, you’ll still be tested on them when taking the Series 7 exam. Take a look:

  • Bearer bonds: These are also known as coupon bonds because they have bearer coupons attached. This bond is not registered in a particular person’s name. The holder submits coupons to the issuer once every six months to receive interest. At maturity, the holder receives par value. Even though they’re no longer issued, it’s important to know because many of them haven’t matured and are still trading in the market.

  • Partially registered bonds: These also called registered coupon bonds or registered as to principal only. This is a bond in which the principal (par value) — but not interest — is registered in the investor’s name. The bearer coupon payments can go to anyone, but only the person named on the bond can claim the principal payment at maturity. This type of bond is still traded, but no longer issued.

  • Fully registered bonds: Fully registered bonds are currently the most common form of bond certificates. This type of bond is registered in an investor’s name and doesn’t have any bearer coupons attached. An investor doesn’t have to submit coupons to receive the semiannual interest payments; the investor receives the interest automatically.

  • Book entry certificates: Book entry certificates, or book entry securities, are recorded in electronic records called book entries; thus, the investor doesn’t receive certificates or coupons. The U.S. government usually issues its securities in book entry form. Although a majority of the bonds trading in the market are bearer, fully registered, or partially registered, book entry certificates are becoming more popular.

On the Series 7 exam, all bearer and partially registered bonds that are in default should be delivered with any unpaid coupons attached. Bonds are considered in default when scheduled interest payments that are owed to the holder by the issuer have not been paid.

Now try your hand at a question about bond certificates.

Which of the following types of bond certificates require the investor to turn in coupons in order to receive interest payments?

I.    Book entry bonds

II.    Fully registered bonds

III.    Bearer bonds

IV.    Partially registered bonds

(A)    I and III

(B)    III and IV

(C)    I, II, and IV

(D)    I, III, and IV

The right answer is Choice (B). Here you see an example of a complex multiple-choice question. If you remember that book entry bonds don’t require the investor to mail in anything, you know Statement I is wrong; therefore, you can immediately cross off Choices (A), (C), and (D).

Both bearer bonds and partially registered bonds require the investor to turn in coupons to the issuer in order to receive interest payments. Book entry bondholders and fully registered bondholders receive interest from the issuer automatically without turning anything in.