Study guide
4.6 Bond Pricing & Yields
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
4.6 Bond Pricing & Yields
Key Takeaways Explain This Topic AI
Bond prices move inversely to interest rates.
Premium bonds: nominal > current > YTM.
Discount bonds: nominal < current < YTM.
At par, all yields are equal.
Duration measures price sensitivity to rate changes.
Longer maturity and lower coupon increase duration.
Zero-coupon bonds have duration equal to maturity.
Convexity refines duration estimates.
Last updated: October 2026
Understanding bond pricing and yields is essential for evaluating fixed-income investments. This section covers the critical relationships that investment advisers must know.
The Fundamental Inverse Relationship
Bond prices and interest rates move in opposite directions.
When Interest Rates... Bond Prices...
- Rise Fall
- Fall Rise
- Why This Happens
When new bonds are issued at higher rates, existing bonds with lower coupon rates become less attractive. Their prices must fall until their yields are competitive.
Example :
- You own a bond paying 4% coupon
- New bonds issued at 5%
- Your 4% bond's price must fall until its effective yield rises to ~5%
- Bond Price Relationships to Par
- Bond Price Relationship Why
- At Par (100) Coupon rate = Market rate Fair value
- Premium (>100) Coupon rate > Market rate Higher coupon is valuable
- Discount (<100) Coupon rate < Market rate Lower coupon is less valuable
- Types of Yields
- 1. Nominal Yield (Coupon Rate)
- Feature Description
- Definition Stated interest rate on the bond
- Fixed? Yes—never changes
- Based On Par value
- Relevance Annual interest payment
- Example : 5% coupon on $1,000 par = $50 annual interest (regardless of price)
2. Current Yield Current Yield = Annual Interest Payment Current Market Price \text{Current Yield} = \frac{\text{Annual Interest Payment}}{\text{Current Market Price}} Current Yield = Current Market Price Annual Interest Payment
- Feature Description
- Based On Current market price
- Shows Income return relative to price paid
- Limitation Ignores capital gains/losses
- Example : $50 annual interest / $950 price = 5.26% current yield
- 3. Yield to Maturity (YTM)
- Feature Description
- Definition Total return if held to maturity
- Includes Coupon payments AND capital gain/loss
- Most Important Primary yield measure for bond analysis
- Assumption Coupons reinvested at YTM rate
YTM accounts for everything : coupon income, time value, and any premium/discount amortization.
4. Yield to Call (YTC)
- Feature Description
- Definition Return if bond called at first call date
- When Used Callable bonds trading at premium
- Important Because Premium bonds likely to be called
Rule : For callable bonds at a premium, compare YTC to YTM—use the lower (yield to worst).
Yield Relationships by Bond Price
- Bond Price Yield Relationships
- Premium Nominal Yield > Current Yield > YTM
- Par All yields are equal
- Discount Nominal Yield < Current Yield < YTM
Memory Trick :
- For discount bonds: yields increase (N < CY < YTM) because you gain the discount
- For premium bonds: yields decrease (N > CY > YTM) because you lose the premium
- Duration: Measuring Price Sensitivity
Duration measures a bond's sensitivity to interest rate changes.
What Duration Tells You
- Duration Value Price Sensitivity
- Higher duration More price change for rate change
- Lower duration Less price change for rate change
Rule of Thumb : A bond with duration of 7 years will change approximately 7% in price for each 1% change in interest rates.
Factors Affecting Duration
- Factor Effect on Duration
- Longer maturity Higher duration
- Lower coupon Higher duration
- Lower yield Higher duration
- Zero coupon Duration = maturity (maximum)
- Duration Examples
- Duration 1% Rate Rise 1% Rate Fall
- 3 years ≈ -3% price ≈ +3% price
- 7 years ≈ -7% price ≈ +7% price
- 15 years ≈ -15% price ≈ +15% price
- Convexity
Convexity measures the curvature of the price/yield relationship.
- Feature Description
- Duration Limitation Assumes linear price change
- Reality Price changes are curved, not linear
- Positive Convexity Prices rise faster/fall slower than duration predicts
- Negative Convexity Prices rise slower/fall faster (callable bonds, MBS)
Positive convexity is good for bondholders : You gain more when rates fall than you lose when rates rise.
- Bond Pricing Conventions
- Treasury Notes and Bonds (32nds)
- Quote Calculation Price per $1,000
- 99-16 99 + 16/32 = 99.5% $995.00
- 101-08 101 + 8/32 = 101.25% $1,012.50
- 98-24 98 + 24/32 = 98.75% $987.50
- In Practice: How Investment Advisers Apply This
Interest rate expectations :
- Expecting rates to rise? Shorten duration (less price decline)
- Expecting rates to fall? Extend duration (more price appreciation)
Client communication :
- YTM is the most comprehensive yield measure
- Duration quantifies interest rate risk
- Premium/discount affects realized return
Bond selection :
- Compare YTM across similar credits
- Consider YTC for callable premium bonds
- Match duration to client time horizon
- On the Exam
The Series 65 exam tests your understanding of:
- Inverse relationship : Rates up = prices down
- Yield relationships : N vs. CY vs. YTM for premium/discount bonds
- Duration : Measures price sensitivity; rule of thumb
- Current yield formula : Annual interest / Price
- Premium vs. discount : Which yields are higher/lower
You need to know relationships but likely won't calculate complex YTM formulas.
- Key Takeaways
- Bond prices move inversely to interest rates
- Premium bonds : N > CY > YTM (yields decrease left to right)
- Discount bonds : N < CY < YTM (yields increase left to right)
- At par : All yields are equal
- Duration measures price sensitivity to rate changes
- Duration of 7 ≈ 7% price change per 1% rate change
- Longer maturity and lower coupon = higher duration
- Zero-coupon bonds : Duration equals maturity
- Convexity measures the curvature beyond what duration captures