Bonds, Debt Securities, and Fixed-Income Basics

Bonds are the core debt instruments in securities markets. They matter on exams because they test capital structure, issuer risk, tax treatment, trading mechanics, and yield analysis all at once. The most useful way to study bonds is to treat them as contractual claims: the issuer promises stated payments, the investor evaluates whether those payments are worth the credit and interest-rate risk, and the market continuously reprices the bond as conditions change.

Why This Chapter Matters

Bond questions often look mechanical, but they usually turn on one of a few core distinctions: debt versus equity, Treasury versus corporate versus municipal credit, coupon rate versus market yield, or price sensitivity versus credit sensitivity. This chapter builds those distinctions directly.

In This Chapter

• What Is a Bond?
• Types of Bonds
• Bond Features
• How Bonds Are Issued and Traded
• Yield and Price Relationships
• Credit Ratings and Default Risk
• Risks and Returns of Bond Investing

Study Approach

When you read a bond fact pattern, identify the issuer, the payment promise, the maturity, the risk source, and the relevant yield or pricing clue. That approach will carry you through most introductory fixed-income questions.

In this section

• What a Bond Is and How Debt Investing Works
  Understand how bonds create creditor claims, why issuers borrow through debt securities, and how bondholders differ from stockholders.
• Types of Bonds Across Government, Municipal, and Corporate Markets
  Compare government, corporate, and municipal bonds by issuer, tax treatment, credit risk, and typical use in U.S. portfolios.
• Key Bond Features, Terms, and Structural Protections
  Understand coupon rate, par value, maturity, call provisions, and other bond features that affect cash flow and investor risk.
• How Bonds Are Issued, Distributed, and Traded
  Learn how bonds reach investors through primary offerings and how bond trading differs from stock trading in the secondary market.
• Bond Yields, Prices, and Interest Rate Relationships
  Understand how bond prices and yields move, how current yield differs from coupon rate, and why interest-rate changes matter.
• Credit Ratings, Credit Risk, and Default Exposure
  Learn how rating agencies classify bond credit quality, what downgrades mean for prices and yields, and how investors evaluate default risk.
• Bond Investing Risks, Returns, and Income Tradeoffs
  Evaluate the major risks of bond investing and understand how income, price change, and maturity profile shape fixed-income return.