SIE Exam: Debt Securities

Section 2 — Understanding Products and Their Risks (44% of exam)

Debt securities are a heavily tested topic on the SIE exam, covering both corporate bonds and U.S. government debt instruments. For corporate debt, you must understand bond pricing (par, premium, and discount), coupon rates, and the key yield measures: nominal yield, current yield, yield to maturity (YTM), and yield to call (YTC). The exam tests your knowledge of secured bonds (mortgage bonds, equipment trust certificates, collateral trust bonds) versus unsecured bonds (debentures and subordinated debentures), credit ratings, and features like call provisions, put provisions, sinking funds, and convertibility. Zero-coupon bonds and their phantom income tax treatment are frequently tested. For U.S. government debt, you need to know Treasury bills (discount instruments under one year), Treasury notes (2-10 years), Treasury bonds (10-30 years), and TIPS (inflation-protected). Agency securities — particularly the distinction between GNMA (full faith and credit) and GSEs like FNMA and FHLMC — are important. Money market instruments including commercial paper, bankers' acceptances, and repos round out this topic. Understanding duration as a measure of interest rate sensitivity is also tested at harder difficulty levels.

Key Concepts

Yield to Maturity (YTM)

The most comprehensive yield measure, accounting for coupon payments, the gain or loss from the difference between purchase price and par value, and the time value of money.

Treasury Bills (T-Bills)

Short-term government securities (4 to 52 weeks) issued at a discount with no periodic interest payments. The return is the difference between purchase price and par.

TIPS

Treasury Inflation-Protected Securities adjust their principal based on changes in CPI. Coupon payments are calculated on the adjusted principal, providing inflation protection.

Duration

A measure of a bond's price sensitivity to changes in interest rates. Higher duration means greater price volatility when rates change.

Debenture

An unsecured corporate bond backed only by the issuer's general creditworthiness, not by specific collateral. Subordinated debentures rank even lower in priority.

GNMA (Ginnie Mae)

The only mortgage-related agency carrying the explicit full faith and credit guarantee of the U.S. government. FNMA and FHLMC are government-sponsored enterprises without this guarantee.

Zero-Coupon Bond

A bond issued at a deep discount that pays no periodic interest. The IRS requires annual reporting of accreted interest (phantom income) even though no cash is received.

Sinking Fund Provision

Requires the issuer to set aside money periodically to retire a portion of the bond issue before maturity, reducing credit risk for bondholders.

Practice Questions

Question 1 of 5

A bond has a coupon rate of 5% and a par value of $1,000. It is currently trading at $950. What is the current yield?

Question 2 of 5

For a callable bond trading at a premium, which yield measure will produce the lowest result?

Question 3 of 5

US Treasury bills differ from Treasury notes and bonds in that T-bills:

Question 4 of 5

Which of the following agency securities carries the full faith and credit guarantee of the US government?

Question 5 of 5

Which of the following describes the concept of duration as it relates to bonds?

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Frequently Asked Questions

What debt securities are tested on the SIE exam?

The SIE covers corporate bonds (secured and unsecured, convertible, callable), U.S. Treasuries (bills, notes, bonds, TIPS, STRIPS), agency securities (GNMA, FNMA, FHLMC), money market instruments (commercial paper, repos, bankers' acceptances), and CMOs.

How are bond yields tested on the SIE?

You need to know four yield measures: nominal yield (coupon rate), current yield (annual coupon / market price), yield to maturity (total return accounting for all cash flows), and yield to call. For premium bonds, YTC is typically the lowest yield; for discount bonds, YTM exceeds current yield.

What is the difference between GNMA and FNMA?

GNMA (Ginnie Mae) carries the full faith and credit guarantee of the U.S. government. FNMA (Fannie Mae) and FHLMC (Freddie Mac) are government-sponsored enterprises (GSEs) with an implied but not explicit government guarantee, making their securities slightly riskier.