Bond Fundamentals

The exam tests bond structure through classification tells. A bond that “matures in installments over several dates” is serial (think municipals timing maturities to a project’s revenue); one where the entire principal comes due on a single date is a term bond; a combination is a serial-with-balloon issue — staggered maturities with a large final tranche. Watch the zero-coupon trap: a zero pays no periodic interest, so a buyer settles with no accrued interest, yet on taxable zeros the IRS taxes the annual accretion (OID) as phantom income each year even though no cash arrives — the classic “which bondholder owes tax before receiving cash” answer.

Don’t confuse fundamentals with the price–yield seesaw or yield-measure ordering — those are separate items; here the answer hinges on structure and definitions, not math. Also separate the indenture (issuer’s promises under the Trust Indenture Act of 1939, which requires a trustee for non-exempt corporate issues over $50 million) from the prospectus (the disclosure document). Memory hook: serial = staggered, term = together.