Series 7 Quiz: Calculate Bond Yield Relationships
20 questions · exam conditions
0:00
Calculate Bond Yield RelationshipsQuestion 1 of 20

A corporate bond is trading at 102. Which of the following statements must be true?

The bond's current yield is higher than its nominal yield.
The bond's nominal yield is higher than its yield to maturity.
The bond's yield to maturity is equal to its current yield.
The bond's yield to call is higher than its yield to maturity.
← Back to quizzes

Series 7 Quiz

Series 7 Quiz: Calculate Bond Yield Relationships

Practice Calculate Bond Yield Relationships in Series 7 with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Calculate Bond Yield Relationships, giving you a quick way to practice the rules, question types, and explanations that matter most for Series 7.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A corporate bond is trading at 102. Which of the following statements must be true?

  1. The bond's current yield is higher than its nominal yield.
  2. The bond's nominal yield is higher than its yield to maturity. (correct answer)
  3. The bond's yield to maturity is equal to its current yield.
  4. The bond's yield to call is higher than its yield to maturity.
Explanation: A bond trading at 102 is trading at a premium. For a premium bond, the yields are ranked from highest to lowest: Nominal Yield > Current Yield > Yield to Maturity > Yield to Call. Therefore, the nominal yield must be higher than the yield to maturity.

Question 2

A 10-year, 5% bond is priced at $1,000. If market yields rise to 6%, what happens to the bond's price?

  1. Price rises above $1,000
  2. Price falls below $1,000 (correct answer)
  3. Price remains at $1,000
  4. Price becomes equal to accrued interest
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves a market yield increase above the coupon rate, which highlights the inverse relationship between yields and bond prices. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by higher market yields causing the bond to trade at a discount to make its effective return competitive. Choice A is incorrect due to a common error of misunderstanding the yield-price inverse, which occurs when students think rising yields increase prices. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like ignoring market yield effects.

Question 3

A 9% bond's annual coupon is $90 and market price is $900. What is the current yield?

  1. 9.00%
  2. 10.00% (correct answer)
  3. 8.10%
  4. 11.11%
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves a bond trading below par with a given annual coupon, which highlights how current yield exceeds the nominal rate in discount situations. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by $90 / $900 = 10.00%. Choice A is incorrect due to a common error of using the nominal rate directly, which occurs when students ignore the market price impact. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like confusing yield measures.

Question 4

A municipal bond yields 4.00%; investor's tax bracket is 25%. What taxable equivalent yield matches the muni?

  1. 3.00%
  2. 5.33% (correct answer)
  3. 4.25%
  4. 6.00%
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves comparing a municipal bond yield to its taxable equivalent for an investor in a specific tax bracket. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by 4.00% / (1 - 0.25) ≈ 5.33%. Choice A is incorrect due to a common error of inverting the formula, which occurs when students misapply the tax adjustment. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like formula confusion in tax equivalency.

Question 5

A bond's duration is 3. If yields fall 2%, estimated price change is closest to:

  1. Down about 6%
  2. Up about 6% (correct answer)
  3. Up about 2%
  4. Down about 2%
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves estimating price impact from a yield decrease using duration, which highlights positive price sensitivity to falling rates. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by approximate change = -duration × yield change = -3 × (-2%) = +6%. Choice A is incorrect due to a common error of applying the wrong sign for yield decline, which occurs when students mishandle the formula. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like sign errors in duration estimates.

Question 6

A 6% bond pays $60 annually and trades at $1,080. What is the bond's current yield?

  1. 5.56% (correct answer)
  2. 6.00%
  3. 6.48%
  4. 5.00%
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves a bond trading above par with an annual coupon payment, which highlights how current yield reflects the income relative to the premium price. The correct answer is choice A because it correctly applies the yield calculation or concept, as shown by $60 / $1,080 ≈ 5.56%. Choice B is incorrect due to a common error of mistaking the nominal rate for current yield, which occurs when students overlook the market price denominator. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like term confusion between yield types.

Question 7

A 7% bond priced at 110 is most likely trading at a premium because market yields are:

  1. Above 7%
  2. Equal to 7%
  3. Below 7% (correct answer)
  4. Unrelated to 7%
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves a bond trading at a premium, which highlights how market yields relate to the coupon rate in premium pricing. The correct answer is choice C because it correctly applies the yield calculation or concept, as shown by premiums occurring when market yields are below the coupon to justify the higher price. Choice A is incorrect due to a common error of associating premiums with higher yields, which occurs when students invert the relationship. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like confusing premium and discount causes.

Question 8

Two 15-year bonds are priced at par; one has a 3% coupon, the other 8%. Which is more rate-sensitive?

  1. The 8% coupon bond
  2. The 3% coupon bond (correct answer)
  3. Both are equally sensitive
  4. Sensitivity depends only on issuer credit
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves bonds with different coupons but same maturity at par, which highlights how lower-coupon bonds are more sensitive to rate changes due to higher duration. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by the 3% bond's cash flows being more back-loaded, increasing its volatility. Choice A is incorrect due to a common error of assuming higher coupons increase sensitivity, which occurs when students misapply duration concepts. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like overlooking coupon effects on duration.

Question 9

A 2-year 5% bond and a 15-year 5% bond are priced at par. If rates fall 1%, which rises more?

  1. The 2-year bond rises more
  2. The 15-year bond rises more (correct answer)
  3. Both rise equally
  4. Neither rises because coupon is fixed
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves bonds with different maturities at par facing a rate decrease, which highlights maturity's role in price appreciation. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by the longer 15-year bond's greater duration leading to a larger price increase. Choice A is incorrect due to a common error of underestimating longer maturities' sensitivity, which occurs when students focus solely on short-term effects. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like maturity-volatility confusion.

Question 10

An investor buys a 7% JKL corporate bond at 98. The bond pays interest semiannually. What is the bond's current yield?

  1. 3.50%
  2. 3.57%
  3. 7.00%
  4. 7.14% (correct answer)
Explanation: Current yield is calculated based on the annual interest, regardless of payment frequency. The annual interest is 7% of $1,000 par, which is $70. The market price is 98% of $1,000, which is 980. Current Yield = Annual Interest / Market Price = \(70 / $980 = 7.14%). The semiannual payment information is a distractor.

Question 11

A bond's yield to maturity decreased from 4.25% to 3.95%. This change represents a decrease of how many basis points?

  1. 3 basis points
  2. 30 basis points (correct answer)
  3. 300 basis points
  4. 0.30 basis points
Explanation: One basis point is equal to 1/100th of 1%, or 0.01%. The change in yield is 4.254.25% - 3.95% = 0.30%. To convert this to basis points, multiply by 100. Thus, 0.30∗100=300.30 * 100 = 30 basis points.

Question 12

All of the following bonds have a 5% coupon. Assuming a general increase in market interest rates, which bond would experience the smallest percentage change in price?

  1. Bond A maturing in 2 years. (correct answer)
  2. Bond B maturing in 10 years.
  3. Bond C maturing in 20 years.
  4. Bond D maturing in 30 years.
Explanation: Bond price volatility is directly related to its time to maturity. Bonds with shorter maturities are less sensitive to changes in interest rates than bonds with longer maturities. Therefore, the bond maturing in 2 years will experience the smallest change in price.

Question 13

An investor purchases a newly issued bond at its par value of $1,000 with a 4.5% coupon. One year later, similar new issue bonds are being offered with a 5.5% coupon. The original bond's current yield will now be:

  1. lower than 4.5%.
  2. equal to 4.5%.
  3. higher than 4.5%. (correct answer)
  4. equal to 5.5%.
Explanation: Since new bonds are offering a higher coupon of 5.5%, market interest rates have risen. Due to the inverse relationship between interest rates and bond prices, the price of the original 4.5% bond must fall below par to be competitive. Current yield is annual interest divided by market price. Since the annual interest ($45) remains constant and the market price has decreased, the current yield must now be higher than the 4.5% nominal yield.

Question 14

A 6% corporate bond with a par value of $1,000 is currently trading in the market at 90. What is the bond's current yield?

  1. 6.00%
  2. 5.40%
  3. 6.67% (correct answer)
  4. 7.00%
Explanation: Current yield is calculated as the annual interest payment divided by the current market price of the bond. The annual interest is 6% of the $1,000 par value, which is $60. The current market price is 90% of par, or 900. Therefore, the current yield is \(60 / $900 = 6.67%).

Question 15

An investor in the 28% federal income tax bracket is considering a 5% tax-free municipal bond. To achieve the same after-tax return, what yield would a taxable corporate bond need to offer?

  1. 5.00%
  2. 3.60%
  3. 6.94% (correct answer)
  4. 7.20%
Explanation: The formula for taxable equivalent yield is: Tax-Free Yield / (1 - Tax Bracket). In this case, it is 55% / (1 - 0.28) = 5% / 0.72 = 6.94%. A corporate bond would need to yield 6.94% to be equivalent to the 5% municipal bond for this investor.

Question 16

A 30-year callable bond and a 30-year non-callable bond are issued by the same corporation with identical coupon rates and credit ratings. If both bonds are trading at a premium, which statement is most likely true?

  1. The callable bond will trade at a higher price and have a lower yield.
  2. The callable bond will trade at a lower price and have a higher yield. (correct answer)
  3. Both bonds will trade at the same price and have the same yield.
  4. The callable bond will have a higher yield to maturity but a lower current yield.
Explanation: A call feature benefits the issuer and represents a risk (reinvestment risk) to the bondholder. To compensate for this additional risk, a callable bond must offer a higher yield to an investor compared to a similar non-callable bond. For the yield to be higher, the price must be lower. Therefore, the callable bond will trade at a lower price and have a higher yield.

Question 17

An investor is considering a 10-year, 5% coupon bond that is callable in 5 years at par. The bond is currently trading at 104. When discussing the potential return with the client, a registered representative must disclose the:

  1. yield to maturity, because it is lower than the yield to call.
  2. current yield, because it reflects the current market price.
  3. yield to call, because it is the lower of the YTM and YTC. (correct answer)
  4. nominal yield, because it is stated on the bond indenture.
Explanation: According to FINRA and MSRB rules, when a callable bond is trading at a premium, the yield to the call date (YTC) will be lower than the yield to maturity (YTM). In this situation, the representative must quote the 'yield to worst,' which is the YTC. This ensures the customer is aware of the lowest possible return they might receive.

Question 18

A client in the 32% tax bracket is evaluating two bonds: a 7% taxable corporate bond and a 5% tax-free municipal bond issued within her state. Which bond offers a higher after-tax yield for this client?

  1. The corporate bond, because its after-tax yield is 5.24%.
  2. The municipal bond, because its 5% yield is greater than the corporate bond's after-tax yield of 4.76%. (correct answer)
  3. The corporate bond, because its nominal yield is higher.
  4. Both bonds offer the same after-tax yield.
Explanation: To compare the bonds, calculate the after-tax yield of the corporate bond. The formula is: Taxable Yield * (1 - Tax Bracket). The corporate bond's after-tax yield is 77% * (1 - 0.32) = 7% * 0.68 = 4.76%. Since 5% (municipal) is greater than 4.76% (corporate after-tax), the municipal bond offers a higher effective yield.

Question 19

A $1,000 par, 8% bond is priced at $1,000. Which yield measure equals 8.00% at purchase?

  1. Current yield only
  2. Yield to maturity only
  3. Current yield and yield to maturity (correct answer)
  4. Yield to call only
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves a bond priced at par, which highlights when various yield measures align with the coupon rate. The correct answer is choice C because it correctly applies the yield calculation or concept, as shown by at par, current yield and YTM both equal the coupon rate of 8%. Choice B is incorrect due to a common error of isolating YTM without considering current yield equivalence at par, which occurs when students overlook par pricing implications. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like yield measure confusion at par.

Question 20

A 20-year 4% bond and a 20-year 9% bond are both priced at par. If rates rise 1%, which falls more?

  1. The 9% bond falls more
  2. The 4% bond falls more (correct answer)
  3. Both fall equally
  4. Neither falls because priced at par
Explanation: This question tests Series 7 competency in calculating bond yields and understanding their price relationships and interest rate sensitivity. A bond's yield provides insight into its return, with current yield, yield to maturity, and yield to call being key metrics. This scenario involves bonds with different coupons at par facing a rate increase, which highlights coupon impact on price sensitivity. The correct answer is choice B because it correctly applies the yield calculation or concept, as shown by the lower-coupon 4% bond having higher duration and thus greater price decline. Choice A is incorrect due to a common error of assuming higher coupons increase volatility, which occurs when students misapply duration principles. Effective strategies include practicing yield calculations under different scenarios and understanding the impact of interest rate changes on bond pricing, along with recognizing common pitfalls like coupon-sensitivity misconceptions.