Saturday, January 17, 2009

Types of corporate bonds

This is the type of question I would expect to see on the Series 6, 7, and 65 exams. Notice how it makes you think as opposed to asking you to recall memorization points.

The XTZ Corporation will issue three series of bonds. Each offer is of the same size and term to maturity. XTZ will issue secured bonds, a series of debentures, and a series of subordinated debentures. Therefore,
A. The subordinated debentures would offer the lowest yield to investors
B. The secured bonds would offer the lowest yield to investors
C. XTZ is reducing the leverage component of its capital structure
D. The debentures would offer the lowest yield to investors

EXPLANATION: when bond investors take on more risk, they demand a higher yield. The secured bonds, backed by collateral, are the safest in terms of default risk, so they would offer the lowest yield here. Subordinated debentures put the investors at the bottom of the pecking order in bankruptcy and, therefore, have to offer a higher yield. Whenever a company issues bonds, they are using and, therefore, increasing leverage. The other way to capitalize is to sell ownership positions called "equity securities," which include common and preferred stock. Notice how analytical one needs to be to get the difficult exam questions right.



  1. Wow! I totally missed that--how are we supposed to keep all these terms straight? Syndicate, selling group, underwriter, blah, blah, blah.

    Oh well. Thanks for posting questions like this. By the way, are you, like married? I was at the Sox class in September--you must work out like all the time.

  2. You're exactly right--learning all the vocabulary and applying it to tricky questions is the big challenge on all the FINRA/NASAA exams. You might want to make a big stack of flash cards. You can also use the glossaries at and to study vocabulary terms.

    BTW, I need to keep this blog focused on exam content. I do try to stay in shape, but I'm not a personal trainer or anything. I just need the extra stamina to teach the full-day seminars on my feet. Believe it or not, teaching Series 7 and Series 65 classes is almost as draining as working out.

  3. OK. I'll make some flashcards. Didn't realize there's a glossary at That thing is awesome!

    Extra stamina, huh?

    Hmmmmmmmmm. ;) LOL