Yield Measures and Bond Risks
Key yield calculations, ranking rules, and bond risk concepts tested on the SIE.
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Questions Covered in This Set
10 cards to master
Nominal yield
The fixed coupon (stated) rate set at issuance; a 5% bond pays $50/year on $1,000 par regardless of market price.
How do you calculate current yield?
Annual interest ÷ current market price. Example: $50 coupon ÷ $800 price = 6.25%.
What is yield to maturity (basis)?
Total annualized return if held to maturity, including coupons plus the gain (discount) or loss (premium) versus the $1,000 par received at maturity.
Rank the yields for a discount bond
Nominal < Current < YTM < YTC (yields climb as you go down the list).
Rank the yields for a premium bond
YTC < YTM < Current < Nominal (yields fall as you go down the list).
What does duration measure?
A bond's price sensitivity to interest rate changes, expressed in years; longer maturity and lower coupon mean higher duration.
Which bond has the greatest interest rate risk?
A long-term zero-coupon bond (e.g., 30-year STRIPS), since duration ≈ maturity with no coupons.
Which bond has no reinvestment risk?
A zero-coupon bond — there are no coupon payments to reinvest (max interest rate risk, zero reinvestment risk).
Call risk
Risk that the issuer refinances/redeems when rates fall, removing your high coupon; offset by higher yields, call protection periods, and call premiums.
Classic Treasury exam trap
U.S. Treasuries have no credit risk but still carry full interest rate (and inflation) risk.
