Study bonds for CISI Introduction to Investment, with a UK-specific reading frame built around the official chapter structure and exam weighting.
Bond questions on this paper are usually practical: who issued the instrument, how does it pay, what risks matter most, and how do yield and price move relative to one another? A solid foundation answer does not need advanced fixed-income mathematics, but it does need proper classification. The most common failure is over-simplification. Candidates often remember that bonds pay interest and redeem at maturity, then lose marks because they miss whether the bond is a gilt, a corporate issue, a floating-rate structure, or an instrument whose main risk is duration, credit, or inflation.
| Check | What matters |
|---|---|
| Official topic weighting | 12% |
| Core distinction under pressure | recognise the bond’s issuer, cash-flow structure, and sensitivity to yield or credit change rather than treating all fixed-income instruments as interchangeable. |
| Strongest use of this page | read it before timed sets so you can recognise what kind of question the chapter is asking |
| UK note | Use UK terminology first: FCA, PRA, Bank of England, HMRC, FOS, FSCS, ISA, SIPP, OEIC, unit trust, gilt, and GBP where a sterling amount matters. |
The exam normally rewards you for reading the characteristics in the stem: issuer type, maturity, coupon structure, seniority, and quality. Once that classification is clear, the likely risk and return profile becomes more defensible.
It also tests the basic relationship between price, yield, and credit quality. You do not need specialist analytics to know that long-dated fixed-rate bonds react differently to rate changes than short-dated or floating-rate structures.
| Section | Main exam angle |
|---|---|
| Bond terminology and characteristics | If the question is really about contractual income and redemption, start with basic bond terms before trying to compare sectors |
| Government bonds | When credit quality and sovereign backing are central clues, a gilt-style answer often becomes attractive |
| Corporate and specialist bond structures | If the stem points to issuer credit or special structural features, move out of plain-gilt thinking |
| Bond risk, yield, and credit quality | Longer-dated fixed-rate bonds usually show more price sensitivity to yield moves than very short or floating-rate issues |
| Bond term | Meaning | Exam clue |
|---|---|---|
| Coupon | Regular interest payment stated as a percentage of nominal value | Income from holding the bond |
| Nominal or par value | Reference amount used for coupon and redemption | Often 100 or 100p in examples |
| Redemption date | Date principal is due to be repaid | Maturity or final repayment |
| Market price | Price paid in the secondary market | Can be above or below par |
| Yield | Return measure linking cash flows to current price | Higher yield may imply lower price or higher risk |
Flat yield uses annual coupon income relative to current market price:
\[ \text{Flat yield} = \frac{\text{Annual coupon}}{\text{Market price}} \times 100 \]If a bond pays an annual coupon of 5 and trades at 95, the flat yield is:
\[ \frac{5}{95} \times 100 = 5.26\% \]Flat yield is a simple income measure. It does not fully capture redemption gain or loss, reinvestment, or the timing of cash flows. Yield to maturity is broader because it considers both coupon income and the return of principal at maturity.
| Bond type | Core feature | Main risk clue |
|---|---|---|
| Gilt | UK government issuer | Low sovereign credit concern but still interest-rate and inflation risk |
| Corporate bond | Company issuer | Credit spread and issuer default risk matter more |
| Floating-rate note | Coupon resets by reference to a rate | Less fixed-rate duration exposure, but still credit and liquidity risk |
| Zero-coupon bond | No regular coupon; issued at discount and redeemed later | Price movement and redemption value drive return |
| Convertible bond | Bond with conversion feature into shares | Mix of credit, rate, and equity-option exposure |
| Asset-backed security | Cash flows linked to a pool of assets | Asset pool quality and structure matter |
| Covered bond | Bond backed by issuer and cover pool | Dual-recourse or collateral-support clue |
| If this happens… | Typical bond effect |
|---|---|
| Market yields rise | Existing fixed-rate bond prices tend to fall |
| Market yields fall | Existing fixed-rate bond prices tend to rise |
| Credit quality worsens | Price may fall and yield may rise to compensate for risk |
| Maturity is longer | Price is usually more sensitive to yield changes |
| Coupon is floating | Interest-rate sensitivity is usually lower than a comparable fixed-rate issue |
| Inflation rises unexpectedly | Real value of fixed nominal payments may fall |
Coupon, maturity, redemption value, issuer, yield, and market price are the core language pieces. Most questions become manageable if you can tell whether the bondholder is receiving fixed contractual cash flows or something more variable.
In UK framing, gilts are the main reference point. The exam typically uses them as the lower-credit-risk benchmark rather than as an invitation into specialist sovereign-debt policy detail.
Corporate and specialist structures add credit and structural complexity. Floating-rate notes, convertibles, subordinated issues, and similar instruments exist because issuers and investors want different balances of risk, income, and optionality.
This is where the classification work pays off. Interest-rate risk, credit risk, inflation risk, and yield comparison questions often look hard only when the candidate has not identified the bond type correctly first.
An investor expects UK market yields to fall and wants a bond holding most likely to benefit from that move if credit quality is unchanged. Which is the best fit?
Answer: A.
If yields fall, the price of an existing long-dated fixed-rate bond tends to benefit more than shorter-dated or floating-rate instruments, assuming no offsetting credit event. That is the key interest-rate-sensitivity distinction.