Fixed Income

Section 2.1: Fixed Income Securities — Bonds and Their Risks Estimated study time: 50 minutes Content: Fixed income securities are a core component of most client portfolios, particularly for income-seeking or risk-averse clients. Series 66 candidates must understand bond mechanics, risks, and how fixed income fits into an overall investment strategy. Corporate bonds are debt obligations issued by corporations to fund operations, acquisitions, or capital expenditures. They pay semiannual coupon interest and return principal at maturity. The yield on a corporate bond exceeds that of a comparable Treasury (the "credit spread") to compensate investors for default risk. The credit spread widens during recessions (when default risk rises) and narrows during economic expansions. Government agency bonds include securities issued by government-sponsored enterprises (GSEs) like Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA). Ginnie Mae securities are backed by the "full faith and credit" of the U.S. government; Fannie Mae and Freddie Mac bonds carry an "implied" (not explicit) government guarantee. Agency bonds typically yield slightly more than Treasuries to compensate for this distinction. Bond yield measures are essential for the Series 66: - Current yield = Annual coupon / Current market price. Simplest measure; ignores time to maturity. - Yield to maturity (YTM) = The total return anticipated if the bond is held to maturity, accounting for price discount/premium amortization. This is the most comprehensive yield measure. - Yield to call (YTC) = The return if the bond is called at the first call date. For callable bonds trading above par, YTC may be more relevant than YTM since issuers are likely to call when they can refinance at lower rates. When a bond is purchased at a…