SIE & Series 7 Bonds Guide 2026: Corporate, Municipal & Government Debt Securities Explained

Why Bonds Are the #2 Hardest Topic on the SIE & Series 7 Exams

If you ask anyone who has studied for a FINRA securities exam which topics gave them the most trouble, the answer is almost always options first, bonds second. Bonds and debt securities are deceptively difficult because they combine conceptual understanding (credit risk, interest rate risk, tax treatment) with mathematical calculations (current yield, yield to maturity, tax-equivalent yield, accrued interest) -- and the exams test both heavily.

On the SIE exam, bonds appear across multiple tested sections. The "Understanding Products and Their Risks" section alone accounts for 44% of the exam, and debt securities are a major component. On the Series 7, the picture is even more intense: bonds, municipal securities, and government debt collectively make up a huge portion of the 73% "Provides Information on Investments" section. You can expect 30 to 40 bond-related questions on the Series 7.

Here is why bonds trip up so many candidates:

• The terminology is vast. Par value, coupon rate, current yield, yield to maturity, yield to call, yield to worst, basis points, duration, convexity -- the vocabulary alone can overwhelm new candidates.
• The math is unavoidable. Unlike equity questions that are often conceptual, bond questions frequently require calculations, especially on the Series 7.
• Municipal bonds are their own universe. GO bonds, revenue bonds, AMT, tax-equivalent yield, official statements, legal opinions, overlapping debt -- municipal securities are effectively a course within a course.
• The inverse price/yield relationship confuses everyone at first. Understanding why bond prices fall when interest rates rise (and vice versa) is intuitive once it clicks, but getting to that point requires effort.

The good news? Bonds are extremely learnable. Unlike options, which require mastering abstract strategies, bonds follow logical rules that reward systematic study. This guide will walk you through everything you need to know.

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Bond Basics: The Essential Foundation

Before diving into specific bond types, you need to master the core vocabulary. Every single term below appears on the SIE and Series 7 exams.

Memory Trick: The Yield Ladder

When a bond trades at a discount (below par), yields line up from lowest to highest:

Coupon Rate < Current Yield < YTM < YTC

When a bond trades at a premium (above par), the order reverses:

Coupon Rate > Current Yield > YTM > YTC

When a bond trades at par, all yields are equal:

Coupon Rate = Current Yield = YTM = YTC

Exam Tip: This yield relationship is tested on virtually every securities exam. If you see a question asking which yield is highest on a discount bond, the answer is YTC. On a premium bond, the answer is the coupon rate (nominal yield).

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Corporate Bonds

Corporate bonds are debt securities issued by companies to raise capital. They are a core topic on both the SIE and Series 7.

Secured vs. Unsecured Corporate Bonds

Exam Tip: In a liquidation, the priority of claims is: Secured creditors > Unsecured creditors (debenture holders) > Subordinated debenture holders > Preferred stockholders > Common stockholders. This order is frequently tested.

Special Types of Corporate Bonds

Convertible Bonds allow the bondholder to convert the bond into a predetermined number of shares of the issuer's common stock. Key points for the exam:

• The conversion ratio tells you how many shares you receive per bond (e.g., 20:1 means 20 shares per bond)
• Conversion price = Par Value / Conversion Ratio (e.g., $1,000 / 20 = $50 per share)
• Parity price is when the bond's market value equals the value of the underlying shares
• Convertible bonds typically carry a lower coupon rate than non-convertible bonds because the conversion feature has value

Callable Bonds give the issuer the right to redeem the bond before maturity, usually at a premium to par. Key exam points:

• Issuers call bonds when interest rates fall (they refinance at a lower rate)
• Callable bonds have reinvestment risk for the investor -- if your bond is called, you must reinvest at lower prevailing rates
• Callable bonds compensate investors with a higher coupon rate than non-callable bonds

Zero-Coupon Bonds are issued at a deep discount and pay no periodic interest. The investor's return is the difference between the purchase price and the par value received at maturity.

• Phantom income: Even though zero-coupon bonds pay no cash interest, the IRS requires the bondholder to report annual accretion (imputed interest) as taxable income each year
• Best suited for tax-deferred accounts (IRAs, 401(k)s) because of the phantom income issue
• Have the highest interest rate risk among bonds of the same maturity because there are no periodic coupon payments to reinvest

Bond Ratings

Bond ratings indicate credit quality. You must know the major rating agencies and what the ratings mean.

Memory Trick: The dividing line between investment grade and junk (non-investment grade/high-yield) is BBB/Baa and above = investment grade. Anything BB/Ba and below = junk/high-yield. Many institutional investors are restricted to investment-grade bonds only.

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U.S. Government Securities

Government securities are considered the safest debt instruments in the world because they are backed by the full faith and credit of the U.S. government. They are also exempt from state and local income taxes (but subject to federal tax). This section is heavily tested.

Types of Treasury Securities

Key Exam Points for Treasury Securities

• T-Bills are the only Treasury security that does not pay periodic interest. They are issued at a discount and mature at par. The difference is the investor's return.
• T-Bills are quoted on a discount yield basis, not a dollar price. This is different from T-Notes and T-Bonds, which are quoted as a percentage of par in 32nds (e.g., 99:16 means 99 and 16/32nds percent of par).
• TIPS protect against inflation. The principal is adjusted based on the Consumer Price Index (CPI). Coupon payments vary because they are a fixed percentage of the adjusted principal. If there is deflation, the principal adjusts downward, but at maturity, the investor receives the greater of the adjusted principal or the original par value.

Exam Tip: A common Series 7 trap question asks about TIPS. Remember: the coupon rate on TIPS stays fixed -- it is the principal that adjusts for inflation, which in turn changes the dollar amount of each coupon payment.

Agency Bonds

Agency bonds are issued by government-sponsored enterprises (GSEs) or federal agencies. They are not directly backed by the U.S. government (with one exception).

Memory Trick: "Ginnie Mae has the Government guarantee." Ginnie Mae is the only one with full faith and credit backing. Fannie Mae and Freddie Mac have only implied government backing -- they are GSEs, not direct government agencies.

Agency bonds carry prepayment risk (also called extension risk on the flip side): when interest rates fall, homeowners refinance their mortgages, which causes mortgage-backed securities to return principal earlier than expected. This is a key testable concept.

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Municipal Bonds

Municipal bonds ("munis") are issued by state and local governments and their agencies. They are a massive topic on the Series 7 and also appear on the SIE. The tax treatment alone makes them a favorite subject for exam writers.

General Obligation (GO) Bonds vs. Revenue Bonds

Other Municipal Bond Types

Double-Barreled Bonds are backed by both a specific revenue source and the taxing power of the municipality. They offer extra safety because if the revenue source falls short, the municipality's taxing power serves as a backstop.

Special Tax Bonds are backed by a specific tax, such as an excise tax on gasoline, tobacco, or alcohol. They are NOT backed by the general taxing power (not GO bonds) and NOT backed by project revenue (not revenue bonds).

Industrial Development Revenue Bonds (IDRBs) are issued by municipalities on behalf of private corporations. The corporation is responsible for debt service, not the municipality. These bonds finance facilities like factories or commercial projects.

Municipal Bond Tax Treatment

This is one of the most heavily tested topics in all of FINRA exam content:

• Federal tax exemption: Interest on municipal bonds is exempt from federal income tax
• State/local tax exemption: If the investor resides in the same state as the issuer, the interest may also be exempt from state and local taxes (triple tax-exempt)
• Capital gains are taxable: If you buy a muni bond and sell it for a profit, the capital gain IS subject to federal tax
• AMT: Interest on certain private activity bonds (like IDRBs) may be subject to the Alternative Minimum Tax (AMT)

Tax-Equivalent Yield Formula

This formula is tested repeatedly on the Series 7 and sometimes on the SIE:

Tax-Equivalent Yield = Municipal Yield / (1 - Tax Rate)

Example: An investor in the 35% federal tax bracket is considering a 3.5% municipal bond. What taxable yield would be equivalent?

Tax-Equivalent Yield = 3.5% / (1 - 0.35) = 3.5% / 0.65 = 5.38%

A corporate bond would need to yield at least 5.38% before taxes to match the after-tax return of the 3.5% municipal bond.

Memory Trick: Municipal bonds are most beneficial for investors in higher tax brackets. A 4% muni is worth 4% to everyone, but it is equivalent to 6.90% for someone in the 42% bracket versus only 4.71% for someone in the 15% bracket. The higher your tax bracket, the more valuable the tax exemption.

Overlapping Debt

Overlapping debt occurs when a property is located within multiple taxing jurisdictions (e.g., city, county, school district), each of which has issued GO bonds. The same taxpayers are on the hook for multiple debt obligations. The exam may ask you to calculate the total direct and overlapping debt for a municipality.

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Bond Pricing & Yields: The Inverse Relationship

This is the single most important concept in all of bond investing, and it is absolutely guaranteed to appear on both the SIE and Series 7 exams:

When Interest Rates Rise, Bond Prices Fall. When Interest Rates Fall, Bond Prices Rise.

Why? Think about it this way:

1. You own a bond paying 4% interest.
2. Market interest rates rise to 6%.
3. No one wants to buy your 4% bond at full price when they can buy a new one paying 6%.
4. To sell your bond, you must lower the price until the effective yield becomes competitive with new 6% bonds.
5. Your bond now trades at a discount (below par).

The reverse happens when rates fall. If you own a 6% bond and new bonds only pay 4%, your bond becomes very attractive and trades at a premium (above par).

Discount vs. Premium Bonds

Current Yield Formula

Current Yield = Annual Coupon Payment / Current Market Price

This is the most frequently tested bond calculation on the SIE:

• A 6% coupon bond trading at $900: CY = $60 / $900 = 6.67%
• A 6% coupon bond trading at $1,000: CY = $60 / $1,000 = 6.00%
• A 6% coupon bond trading at $1,200: CY = $60 / $1,200 = 5.00%

Nominal Yield (Coupon Rate)

The nominal yield never changes. It is the coupon rate printed on the bond. A 5% bond always pays $50 per year per $1,000 of face value, regardless of what the bond is trading at in the market.

Exam Tip: If a question says "a 5% bond," it means the coupon rate is 5% and the annual interest payment is $50 per $1,000 face value. Do not confuse this with current yield or YTM.

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Interest Rate Risk & Bond Prices

Interest rate risk is the risk that rising interest rates will cause bond prices to fall. It is the primary risk for most bond investors and the most tested risk concept on the SIE and Series 7.

Two Key Rules of Interest Rate Risk

Rule 1: Longer maturity = Greater interest rate risk

A 30-year bond will lose far more value than a 5-year bond when rates rise by 1%. Why? Because investors are locked into the below-market coupon rate for much longer with the 30-year bond.

Rule 2: Lower coupon = Greater interest rate risk

A 2% coupon bond is more sensitive to rate changes than a 7% coupon bond with the same maturity. The lower-coupon bond returns less cash flow early on, making the investor more dependent on the final principal payment.

Duration: A Measure of Price Sensitivity

Duration measures how sensitive a bond's price is to changes in interest rates. You do not need to calculate duration on the SIE (and rarely on the Series 7), but you need to understand the concept:

• Higher duration = More price sensitivity to rate changes
• Duration increases with longer maturity and lower coupon rates
• Zero-coupon bonds have the highest duration of any bond with the same maturity because all cash flow comes at the end
• A bond with a duration of 7 years will decline approximately 7% in price if interest rates rise by 1%

Exam Tip: If a question asks which bond is "most affected" or has the "greatest price change" when rates move, look for the bond with the longest maturity and lowest coupon. If a question asks which bond is "least affected," look for the shortest maturity and highest coupon.

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Bond Calculations That Appear on the Exam

Both the SIE and especially the Series 7 test bond-related math. Here are the calculations you must know.

1. Current Yield (Both Exams)

Current Yield = Annual Coupon / Market Price

Example: An 8% bond trading at $1,100.

• Annual Coupon = 8% x $1,000 = $80
• Current Yield = $80 / $1,100 = 7.27%

2. Tax-Equivalent Yield (Series 7, Sometimes SIE)

Tax-Equivalent Yield = Muni Yield / (1 - Tax Rate)

Example: A 3% muni for an investor in the 24% bracket.

• TEY = 3% / (1 - 0.24) = 3% / 0.76 = 3.95%

3. Accrued Interest (Series 7)

When a bond is sold between coupon dates, the buyer pays the seller the accrued interest from the last coupon date to the settlement date. The exam tests the day-count conventions:

• Corporate and municipal bonds: Use a 30/360 day count (each month = 30 days, year = 360 days)
• Government bonds: Use actual/actual day count (actual number of days in each month and year)

Accrued Interest = (Annual Coupon / 360 or 365) x Number of Days

Example: A 6% corporate bond pays interest on January 1 and July 1. The bond is sold with a settlement date of March 1.

• Days of accrued interest: January (30) + February (30) = 60 days (using 30/360 convention)
• Accrued interest per bond = ($60 / 360) x 60 = $10.00
• The buyer pays the seller the market price plus $10 in accrued interest

Exam Tip: The buyer pays accrued interest to the seller but gets it back at the next coupon date when they receive the full semiannual interest payment. The seller reports accrued interest received as ordinary income.

4. Basis Points (Both Exams)

• 1 basis point = 0.01%
• 100 basis points = 1%
• If a bond yield moves from 4.50% to 4.75%, it increased by 25 basis points
• If the Fed raises rates by 50 basis points, rates increased by 0.50%

5. Bond Dollar Price from Quote (Series 7)

Corporate bonds are quoted as a percentage of par. A quote of 98.5 means the bond is trading at 98.5% of $1,000 = $985.

Government bonds are quoted in 32nds. A quote of 99:16 means 99 and 16/32 = 99.5% of $1,000 = $995.

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SIE vs. Series 7: What Bond Content Differs?

Understanding what each exam expects will help you focus your study time.

For SIE Candidates

Focus on:

• Characteristics of each bond type
• The inverse price/yield relationship
• Current yield calculation
• Basic risks (credit risk, interest rate risk, reinvestment risk, call risk, inflation risk)
• Tax treatment of municipal bonds
• Bond ratings and what they mean
• Priority of claims in bankruptcy

For Series 7 Candidates

You need everything above PLUS:

• Tax-equivalent yield calculations
• Accrued interest calculations (30/360 for corporate/muni, actual/actual for government)
• Yield comparisons (nominal, current yield, YTM, YTC)
• Detailed municipal bond analysis
• Bond suitability for different client scenarios
• Underwriting and syndicate operations for new issues
• Margin requirements for bond positions

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Common Exam Traps and How to Avoid Them

After reviewing thousands of exam questions, here are the most common traps students fall into on bond questions:

Trap 1: Confusing Yield Types

The exam will give you a bond's coupon rate and market price and ask for "yield." Make sure you know which yield they are asking for. Current yield, YTM, and nominal yield are all different numbers.

Trap 2: TIPS Principal vs. Coupon

TIPS questions often trick candidates into thinking the coupon rate changes with inflation. It does not. The coupon rate is fixed -- it is the principal that adjusts.

Trap 3: Ginnie Mae vs. Fannie Mae/Freddie Mac

Only Ginnie Mae carries the full faith and credit of the U.S. government. Fannie Mae and Freddie Mac have only implied backing. This distinction appears on nearly every version of the SIE.

Trap 4: Municipal Bond Taxability

Municipal bond interest is federally tax-exempt, but capital gains on municipal bonds are taxable. Also, interest on certain private activity bonds may be subject to AMT.

Trap 5: Call Risk Direction

Issuers call bonds when interest rates fall (not rise). This creates reinvestment risk for the investor because they must reinvest the returned principal at lower prevailing rates.

Trap 6: Day Count Conventions

Corporate and municipal bonds use 30/360 for accrued interest. Government bonds use actual/actual. Mixing these up on a Series 7 calculation question will give you a wrong answer.

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Your Bond Study Action Plan

Here is a proven approach to mastering bonds for your exam:

Week 1: Build the Foundation

• Learn all bond terminology (par value, coupon, maturity, yields)
• Understand the inverse price/yield relationship
• Practice current yield calculations until they are automatic

Week 2: Dive Into Bond Types

• Master corporate bond features (secured vs. unsecured, convertible, callable, zero-coupon)
• Learn U.S. government securities characteristics
• Study bond ratings and credit risk

Week 3: Municipal Bonds

• GO bonds vs. revenue bonds -- know the differences cold
• Tax-equivalent yield calculations
• Tax treatment rules and exceptions (AMT, capital gains)

Week 4: Advanced Topics and Calculations (Series 7)

• Accrued interest calculations
• Yield comparisons and the yield ladder
• Bond suitability scenarios
• Practice full-length timed quizzes

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Final Thoughts: Why Bonds Are Worth the Effort

Bonds are challenging, but they are also predictable. Unlike options, which have dozens of possible strategy combinations, bond questions follow recognizable patterns. Once you understand the core concepts -- the inverse relationship, yield calculations, credit risk, and tax treatment -- you will find that bond questions become some of the easiest points on the exam.

The candidates who struggle with bonds are almost always the ones who skip the math practice. Do not be that candidate. Sit down with the formulas, work through examples by hand, and then test yourself with realistic exam questions. The investment in practice time pays off enormously on exam day.

Key takeaway: Bonds are the second most important topic on both the SIE and Series 7 exams. Master the concepts in this guide, practice the calculations, and use our free AI-powered tools to fill in any gaps. You will walk into the testing center confident and prepared.

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