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Bonds and fixed-income securities are a core component of the SIE Exam, requiring mastery of the inverse relationship between market rates and prices, yield categories, and debt types. Secondary market volatility is driven by maturity, coupon rate, and credit rating. 

 

Below are the three foundational SIE bond practice questions with answers and explanations: 

 

PRACTICE QUESTION 1: INTEREST RATE RISK

 

 

• Question: A customer expects falling interest rates and wants to maximize price appreciation. What should you recommend?

• (A) 30-year Treasury, 5% coupon

• (B) 30-year Treasury zero-coupon

• (C) 5-year Treasury, 4% coupon

• (D) 5-year zero-coupon. 

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• Answer: B 

   

• Explanation: Longest maturities and lowest coupons provide the highest sensitivity (duration) to falling rates, maximizing price appreciation. 

   

PRACTICE QUESTION 2: THE BOND SEESAW

 

 

• Question: An investor buys a corporate bond at $1,050. Which is true?

• (A) Nominal > Current Yield

• (B) YTM > Current Yield

• (C) Current > Nominal

• (D) YTC > YTM. 

   

• Answer: A 

   

• Explanation: At a premium above $1,000 par, the hierarchy is Nominal Yield > Current Yield > Yield to Maturity > Yield to Call. 

   

PRACTICE QUESTION 3: MUNICIPAL DEBT TAXATION

 

 

• Question: How is interest on a home-state municipal bond treated for an investor in a high federal tax bracket?

• (A) Federal taxed/state exempt

• (B) Federal exempt/state taxed

• (C) Triple tax-exempt

• (D) Fully taxed. 

   

• Answer: C 

   

• Explanation: Home-state municipal interest is typically exempt from federal, state, and local income taxes (triple tax-exempt).