Series 7 Podcast - Bond Concepts

And of course, everyone by now knows that there's an inverse relationship between bond prices and interest rates.

Interest rates go up, bond prices come down, interest rates go down, bond prices go up.

But there's a lot more you need to know about bond concepts to be able to answer questions about bonds on the Series 7 exam.

So there are three factors that greatly influence a bond's price volatility.

Number one is the maturity.

And so the longer the maturity, the greater the price volatility of a bond.

Long-term bonds are a lot riskier than short-term bonds.

Also, the lower the nominal rate on a bond, the greater the price volatility of a bond.

So low coupon bonds, and at the extreme case, zero coupon bonds are much riskier than bonds with higher nominal rates or higher coupon rates.

And also, The lower the credit rating on a bond, the greater the price volatility of a bond.

Bonds of companies that are not doing all that well, well, they're going to be a lot riskier than bonds of companies that are doing really well.

In contrast, the shorter the maturity on a bond, the less price volatility you'll see on a bond.

Short-term bonds are a lot safer than long-term bonds.

Also, the higher the coupon rate on a bond, the less price volatility you'll see on a bond.

Higher coupon bonds or higher nominal rate bonds move around a lot less in price than lower coupon rate bonds.

And then also the credit rating.

Well, the higher the credit rating on a bond, the less the price volatility of a bond.

So bonds with really high credit ratings like ExxonMobil, Johnson & Johnson, they're going to be a lot safer than bonds that are not in such good financial shape.

Now, also, very importantly for the Series 7 exam and other exams too, you're going to want to know about the order of the yields.

Well, there are four yields on a bond.

There is a nominal yield, which is really just the stated rate, or sometimes we'll say there's the coupon rate.

Second, you have the current yield, which is basically just the annual interest relative to the current market value of that bond.

Third, you have the yield to maturity.

That measures the return you're going to get on the bond, which mostly includes yield if you hold it to maturity.

And finally, you have the yield to call.

And of course, everyone by now knows that there's an inverse relationship between bond prices and interest rates.

Interest rates go up, bond prices come down, interest rates go down, bond prices go up.

But there's a lot more you need to know about bond concepts to be able to answer questions about bonds on the Series 7 exam.

So there are three factors that greatly influence a bond's price volatility.

Number one is the maturity.

And so the longer the maturity, the greater the price volatility of a bond.

Long-term bonds are a lot riskier than short-term bonds.

Also, the lower the nominal rate on a bond, the greater the price volatility of a bond.

So low coupon bonds, and at the extreme case, zero coupon bonds are much riskier than bonds with higher nominal rates or higher coupon rates.

And also, The lower the credit rating on a bond, the greater the price volatility of a bond.

Bonds of companies that are not doing all that well, well, they're going to be a lot riskier than bonds of companies that are doing really well.

In contrast, the shorter the maturity on a bond, the less price volatility you'll see on a bond.

Short-term bonds are a lot safer than long-term bonds.

Also, the higher the coupon rate on a bond, the less price volatility you'll see on a bond.

Higher coupon bonds or higher nominal rate bonds move around a lot less in price than lower coupon rate bonds.

And then also the credit rating.

Well, the higher the credit rating on a bond, the less the price volatility of a bond.

So bonds with really high credit ratings like ExxonMobil, Johnson & Johnson, they're going to be a lot safer than bonds that are not in such good financial shape.

Now, also, very importantly for the Series 7 exam and other exams too, you're going to want to know about the order of the yields.

Well, there are four yields on a bond.

There is a nominal yield, which is really just the stated rate, or sometimes we'll say there's the coupon rate.

Second, you have the current yield, which is basically just the annual interest relative to the current market value of that bond.

Third, you have the yield to maturity.

That measures the return you're going to get on the bond, which mostly includes yield if you hold it to maturity.

And finally, you have the yield to call.