Types of Bonds — Review for the Series 7 Exam

By Steven M. Rice

When issuers want to borrow money from the public, they issue debt securities, such as bonds. For the Series 7 exams, you need to understand the different types of bonds.

Practice questions

  1. Term bonds are quoted according to

    A. a percentage of dollar price

    B. its nominal yield

    C. its yield to call

    D. its yield to maturity

    Answer: A. a percentage of dollar price

    Term bonds are also called dollar bonds because they’re quoted according to a percentage of dollar price. For example, a term bond that’s trading for $990 would be quoted as 99 (99 percent of $1,000 par).

  2. The call premium on a callable bond is

    A. the amount an investor must pay above par value when calling the bonds early

    B. the amount an issuer must pay above par value when calling its bonds early

    C. the amount of interest an issuer must pay on its callable bonds

    D. the difference in interest an issuer must pay on its callable bonds over its non-callable bonds

    Answer: B. the amount an issuer must pay above par value when calling its bonds early

    A call premium is the amount over par value paid by an issuer if calling its bonds in the early years.

  3. HIJ Corp. has issued $30 million worth of convertible mortgage bonds, which are convertible for $25. The bonds are callable beginning in March 2020, while the maturity date is March 2040. The bond trades at 98, and the stock trades at $24. The bonds are secured by

    A. rolling stock

    B. the full faith and credit of HIJ Corp.

    C. securities owned by HIJ Corp.

    D. a lien on property owned by HIJ Corp.

    Answer: D. a lien on property owned by HIJ Corp.

    This is one of those questions that takes you on a ride full of superfluous information you don’t need. All you need to know is what the bonds are secured by. In this case, you’re dealing with mortgage bonds, which are secured by a lien on property owned by HIJ. In the event that HIJ failed to pay principal and/or interest to its bondholders, property owned by HIJ would be sold to generate the money to make the payments.