Study guide
2.2 Bond Yields and Pricing
Series 7 General Securities Representative
Track your progress as you read
Finished sections get a check mark.
1 Introduction
About the Series 7 How to Use This Guide
2 Chapter 1: Equity Securities
1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities
3 Chapter 2: Debt Securities
2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks
4 Chapter 3: U.S. Government & Agency Securities
3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments
5 Chapter 4: Municipal Securities
4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules
6 Chapter 5: Investment Companies
5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation
7 Chapter 6: Variable Products & Annuities
6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance
8 Chapter 7: Alternative Investments & DPPs
7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives
9 Chapter 8: Options
8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements
10 Chapter 9: Customer Accounts
9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts
11 Chapter 10: Retirement & Education Plans
10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation
12 Chapter 11: Securities Markets & Trading
11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants
13 Chapter 12: Rules, Regulations & Ethics
12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct
2.2 Bond Yields and Pricing
Key Takeaways Explain This Topic AI
Nominal yield is the coupon rate based on par value.
Current yield uses market price and moves opposite to price.
YTM is the most complete yield measure for non-callable bonds.
YTC applies to callable bonds; YTW is the lower of YTM and YTC.
Yield order differs for premium, discount, and par bonds.
Yield-curve shape signals market expectations.
Last updated: October 2026
The Four Yields
Nominal yield (coupon) is the stated rate on par and never changes: $70 on a $1,000 bond is a 7% nominal yield.
Current yield measures annual income against the current price :
Current Yield = Annual Interest ÷ Market Price
A 7% bond ($70) trading at $875 yields $70 ÷ $875 = 8.0% . Current yield exceeds the coupon on a discount bond and falls below it on a premium bond.
Yield to maturity (YTM) is the total annualized return if held to maturity, capturing coupons plus the gain (discount bond) or loss (premium bond) versus par. It is the standard for comparing non-callable bonds. The exam-friendly approximation:
YTM ≈ [Annual Interest + ((Par − Price) ÷ Years)] ÷ [(Par + Price) ÷ 2]
Worked example: A 6% bond at $950, 10 years left. Annual interest $60; annual gain ($1,000 − $950)/10 = $5; average price ($1,000 + $950)/2 = $975. YTM ≈ ($60 + $5)/$975 = 6.67% .
Yield to call (YTC) substitutes the call price and years-to-call for par and years-to-maturity. It matters most for premium callable bonds , which issuers are likely to call when rates fall.
Yield to worst (YTW) is the lower of YTM and YTC — the most conservative figure a rep should quote to a client on a callable bond.
The Bond See-Saw: Yield Order
Knowing the order of the four yields by price state is worth several exam points. The mnemonic: for a discount bond everything is higher than the coupon because the investor gains the discount; for a premium bond everything is lower because the investor loses the premium.
- Price Yield order (low → high)
- Discount Coupon < Current Yield < YTM < YTC
- Par Coupon = Current Yield = YTM = YTC
- Premium YTC < YTM < Current Yield < Coupon
Why YTC is the extreme: for a discount bond, calling it early pays par sooner, accelerating the gain — so YTC is the highest . For a premium bond, an early call forces the loss of premium over a shorter period — so YTC is the lowest and equals YTW.
Duration and Volatility
Duration estimates how much a bond's price moves for a 1% change in rates. Longer maturity and lower coupon both raise duration, hence volatility. A zero-coupon bond has duration equal to its maturity — the most price-sensitive structure of all. Reps use this to match a client's risk tolerance: short-duration bonds for stability, long-duration for rate-sensitive plays.
The Yield Curve
The yield curve plots yield against maturity for bonds of similar credit quality (usually Treasuries):
- Curve Shape What it implies
- Normal (positive) Upward Longer terms pay more; healthy growth expectations
- Inverted (negative) Downward Short rates exceed long rates; classic recession signal
- Flat Horizontal Little term premium; transition or uncertainty
- Humped Peaks mid-curve Intermediate yields highest; unusual transition
A normal curve reflects investors demanding extra yield for the time and uncertainty of long maturities. An inverted curve — short-term yields above long-term — has historically preceded recessions, because investors expect rates (and growth) to fall. A flat curve often appears when the market is transitioning between a normal and an inverted shape, signaling uncertainty about the economy's direction. The shape is driven largely by Federal Reserve policy at the short end and by inflation and growth expectations at the long end.
Putting the Yields Together: A Worked Comparison
Suppose a client is comparing two bonds, each $1,000 par with a 5% coupon. Bond A trades at $920 (a discount) and Bond B trades at $1,080 (a premium); both mature in 10 years. Bond A's current yield is $50 ÷ $920 = 5.43%, already above the 5% coupon, and its YTM is higher still because the investor also collects the $80 discount over 10 years. Bond B's current yield is $50 ÷ $1,080 = 4.63%, below the coupon, and its YTM is lower still because the $80 premium is lost by maturity. This is the see-saw in action: the discount bond's yields all sit above the coupon, the premium bond's all sit below it.
A representative who internalizes this can answer most yield-ordering questions in seconds without any calculation, simply by spotting whether the bond is priced above or below par.
Quoting Yields to Clients
Confirmation rules reflect the same caution. For municipal securities, MSRB Rule G-15 requires the yield or dollar price on a customer confirmation to be computed to the lower of call or maturity. For other debt securities, SEC Rule 10b-10 requires a trade priced on yield to call (or another basis) to show the yield to maturity as well when it is lower. Quoting the yield to worst keeps a client from relying on an attractive-looking YTM that the issuer can cut short with a call. For a premium callable bond this means quoting the YTC; for a discount callable bond the YTM is typically the worst case. Always frame the yield discussion around the client's actual holding period — a buyer who plans to sell in two years cares about price volatility far more than about a 10-year YTM.
On the Exam
The most common calculation is current yield . Also expect: ordering yields for premium vs. discount bonds, identifying that YTC is most relevant for premium callable bonds , recognizing YTW as the lower of YTM/YTC, and interpreting yield-curve shapes — especially the inverted curve as a recession indicator.