Lesson Overview
Connect bond terms and credit risk to yield and price behavior.
Level I questions are three-choice multiple choice and are built to reward fast recognition of the relevant rule, relationship, or calculation path. For this lesson, the job is to turn the topic into a repeatable exam move rather than another note to reread.
Mental Model
A bond stack shows seniority, collateral, covenants, embedded options, and spread layers.
In the Above MPS system, this sits in Payoffs + Risk: Climb the payoffs. Use that shape as the memory hook, then connect it to the precise facts in the question stem.
Exam Playbook
- Name the topic before calculating. Decide whether the stem is asking for a definition, direction of effect, classification, or numerical result.
- Apply the rule that changes the answer. Ignore details that do not affect the relationship being tested.
- Check the answer against the common trap. If the tempting choice matches one of the traps below, slow down before locking it in.
High-Yield Map
- Higher credit risk generally requires higher spread.
- Embedded options shift value between issuer and investor.
- Covenants can reduce creditor risk.
Common Traps
- Confusing callable and putable value effects.
- Ignoring seniority in recovery assumptions.
- Using a yield measure without matching the bond feature.
Repair Drills
- Classify embedded option benefit as issuer or investor.
- Rank three bonds by expected spread using only structural clues.