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Lesson 1 of 3 11–14% of the exam

The features of a bond

A bond is a loan made tradable. Six features describe it: who borrows (issuer), when the final payment is due (maturity), how much is repaid (principal or par), what interest is paid and how often (coupon rate and frequency), where it ranks (seniority) and what can change the cash flows (contingency provisions).

6 min cram, 30 min full read. Based on the 2027 CFA® Program Level I curriculum, Fixed Income, Learning Module 1. Also part of the 2026 curriculum, so it applies to the November 2026 exam too.

Tailor this to you: take the self-assessment

Before this: Returns of Financial Assets, Time Value of Money in Finance

On the exam

  • Describe the features of a fixed-income security

Describe the features of a fixed-income security. Expect: match a term sheet line to its feature; compute a fixed or floating coupon payment; classify a security by tenor at issue; rank claims by seniority.

How deeply to learn each part
Know the idea
Understand it in general. It frames other topics, but you will not calculate with it.
Use it
Understand it well enough to solve a question with it. Recognize when it applies.
Memorize
Learn it by heart. The exam will not give it to you.

You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.

You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.

Cram mode: the one-screen version of this lesson. Switch to Full for the explanations, worked examples and interactives.

What is the difference between a loan and a bond?

Both are borrowing with a promise to pay interest and repay principal. A loan is a private agreement, usually between a borrower and a bank. A bond is standardized and built to trade, so many investors can hold slices of the same debt.

Together they are fixed-income instrument s. All of them are liabilities of the borrower, but not every liability is fixed income: accounts payable, deferred revenue and taxes payable are obligations to suppliers, customers and the tax authority, not borrowing from investors. Leases and pensions resemble debt but are covered elsewhere.

A bond differs from a share in three ways: its cash flows are committed by contract, it carries no vote, and it ranks higher when the issuer fails.

What are the six features of a bond?

Every bond is described by the same six items, laid out on its term sheet. Here is one we will use throughout.

Term sheet lineFeatureIn one sentence
Issuer: Halvorsen Shipping ASAIssuerThe legal entity that owes every payment.
Maturity: 7 years from settlementMaturityThe date of the final payment.
Principal: USD 500 millionPar (face value)What is repaid at maturity.
Coupon: 4.50%, paid semiannuallyCoupon rate and frequencyAnnual interest = rate × par, split evenly across the year’s payments.
Ranking: senior unsecuredSeniorityPlace in the queue in bankruptcy.
Call: noneContingency provisionA clause that changes the cash flows if an event happens.
The six features that define a bond
Bond (fixed-income security)a tradable loan with committed cash flows
  • Issuer Use it who owes every payment
  • Maturity Memorize date of the final payment
  • Principal (par, face value) Memorize the amount repaid; coupons are measured on it
  • Coupon rate and frequency Memorize interest paid, and how often
    • Fixed coupon same payment every period
    • Floating-rate note MRR (resets) + credit spread (fixed)
    • Zero-coupon bond no coupons; the discount to par is the interest
  • Seniority Memorize place in the queue in bankruptcy
  • Contingency provisions Use it embedded call, put or conversion option

The issuer can be any legal entity: a national or local government, a supranational such as the World Bank, a government-owned agency, a corporation or a special purpose entity that holds loans. Sovereign bonds are backed by taxing power, so they are usually the safest in their own market.

Maturity, tenor and principal

The maturity is the date of the final payment. The tenor is the time remaining until it. Securities are classed by their tenor when first issued.

Securities by tenor at issue
Fixed-income securityclassified by tenor when first issued
  • Money market security Memorize one year or less (T-bills, commercial paper)
  • Capital market security Memorize longer than one year
  • Perpetual bond Use it no maturity date; still debt, not equity

Money market securities have a tenor of one year or less at issue (Treasury bills, commercial paper). Capital market securities are longer. A perpetual bond has no maturity date but is still debt: its cash flows are set by contract, it has no votes and it ranks ahead of equity.

The principal (also par value or face value) is the amount the issuer agrees to repay. Some debt repays principal in pieces, as a mortgage does, rather than as one lump sum at maturity.

How do you calculate a coupon payment?

The coupon rate is applied to par, never to the price the bond trades at. The annual coupon is split evenly across the payment dates.

Fixed coupon payment Memorize
C=c×ParmC = \frac{c \times \text{Par}}{m}

Here c is the coupon rate and m is the number of payments a year (1, 2, 4 or 12). Corporate bonds usually pay semiannually.

Rearrange itFixed coupon payment: solve for payment, rate or par
The question asks for
A bond with a par value of 500.00 pays a 4.50% coupon 2 times a year. Each coupon payment is closest to:

0.045 × 500.00 ÷ 2 = 11.25

Payment each period (same units as par)11.25

On your calculator
  1. 500×0.045÷2=par, not price
  1. 500ENTER0.045×2÷par, not price

ENTER enter (on the HP, puts the number on the stack)

InteractiveA fixed-coupon bond: the terms set every payment

Try this 0 of 3

  • Halve each coupon payment without touching the coupon rate
  • Give the FRN a rising reference rate, then change its spread
  • Issue a zero-coupon bond and find the interest it pays
Coupon type
Payments a year
Issuer
Halvorsen Shipping ASA
Maturity
7 years from settlement
Principal (par)
USD 500 million
Coupon rate and frequency
4.5%, paid semiannually
Seniority
Senior unsecured
Contingency provisions
None (no call, put or conversion)
Issuer → investorInvestor → issuer−500 at issue11.25 × 13+511.25par 500IssueYear 4Year 7

Amounts in USD millions. Above the line: what the issuer pays the investor; below: what the investor pays at issue. Coupons are drawn to a larger scale than the principal so each one stays visible.

Each couponUSD 11.25 million
Final paymentUSD 511.25 million
Total interest (14 coupons)USD 157.5 million
Show working

Annual coupon = coupon rate × par = 4.5% × 500 = 22.5 million.

Each payment = annual coupon ÷ payments a year = 22.5 ÷ 2 = 11.25 million, 14 times (7 years × 2).

Final payment = last coupon + par = 11.25 + 500 = 511.25 million. The price the bond trades at never enters the coupon.

On your calculator
  1. 500×0.045÷2=11.25, each coupon
  1. 500ENTER0.045×2÷11.25, each coupon

ENTER enter (on the HP, puts the number on the stack)

Six terms on a term sheet fully describe the cash flows you are buying.

How does a floating-rate note pay interest?

A floating-rate note (FRN) has a coupon that resets. The coupon rate is a market reference rate (MRR) plus a credit spread .

Floating-rate note coupon Memorize
C=(MRR+s)×ParmC = \frac{(\text{MRR} + s) \times \text{Par}}{m}

The MRR is a standard short-term borrowing rate for the highest-quality borrowers, and it resets each period from the market. The spread s is set at issue, is quoted in basis points (hundredths of a percentage point) and usually stays constant. The stronger the issuer, the smaller the spread.

Rearrange itFloating-rate note: solve for payment, spread or reference rate
The question asks for
A floating-rate note with a par value of 40.00 pays interest 4 times a year at MRR plus 180 bps. MRR is 3.10% for the period. The interest payment is closest to:

(0.031 + 0.018) × 40.00 ÷ 4 = 0.49

Interest payment (same units as par)0.49

On your calculator
  1. 0.031+0.018×40÷4=MRR + spread first, as decimals
  1. 0.031ENTER0.018+40×4÷MRR + spread first, as decimals

ENTER enter (on the HP, puts the number on the stack)

A zero-coupon bond (or pure discount bond) pays no coupons. It is bought below par and repaid at par, and the gap is all the interest, received in one go at maturity.

Exam tip FRN: the market part resets, the issuer part stays. Zero: the discount is the interest.

What are seniority and contingency provisions?

Seniority is a claim’s priority in bankruptcy or liquidation. Senior debt is paid before subordinated debt (also called junior debt), which is paid only once senior claims are satisfied. Lesson 3 adds security to the ranking.

A contingency provision allows an action if an event occurs. The most common are embedded option s: the right to call (redeem early), put (sell back) or convert to shares. They cannot be traded apart from the bond. Their value is the price of the bond with the option minus the price of an otherwise identical bond without it. The next module builds on this.

Go deeper Why governments mostly issue bonds, not loans

National and local governments are usually financed by bonds rather than bank loans. They are large, long-lived borrowers, and bonds let them reach many investors at once. The main exception is lending from supranational bodies such as the International Monetary Fund (IMF), which is made by private agreement and is a loan.

Go deeper Perpetual bonds in practice

Public-sector entities issued the first perpetual bonds, and some local authorities still do. Banks also issue perpetual bonds to meet regulatory capital requirements. Many of these can be called by the issuer or converted into equity if the bank is in trouble, which links them to the contingency provisions of the next module.

Go deeper Why survey-based reference rates were replaced

Floating rates were once set by polling banks on what they would charge each other (Libor). A poll can be nudged. Reference rates now follow the average of rates observed in real market transactions, which is much harder to manipulate. For the exam, remember that the MRR is a market-observed rate that resets each period.

Memorize this

MemorizeSix features, one plain job each

FeatureJob
Issuerwho owes the payments
Maturitydate of the final payment
Principal (par)amount repaid; base for coupons
Coupon rate, frequencyinterest = rate × par ÷ payments a year
Seniorityrank in bankruptcy
Contingency provisionscall, put, conversion

Memory hook I-M-P-C-S-C: "I Must Pay Coupons, Seniors first, Contingencies".

Know it cold Coupons come from par, never from price. Divide by payments per year.

MemorizeThree ways to pay interest

TypeInterest
Fixed couponsame each period
Floating-rate noteMRR resets, spread fixed (bps)
Zero-couponnone; bought below par, repaid at par

Memory hook Floating = float with the market (MRR); the spread is the issuer's own "tag" and stays put.

Know it cold Stronger issuer, smaller spread.

MemorizeTenor classes

Memory hook One year is the line: up to 1 year money, over 1 year capital.

Know it cold Classify by tenor at issue, not by time left.

The six features that define a bond
Bond (fixed-income security)a tradable loan with committed cash flows
  • Issuer Use it who owes every payment
  • Maturity Memorize date of the final payment
  • Principal (par, face value) Memorize the amount repaid; coupons are measured on it
  • Coupon rate and frequency Memorize interest paid, and how often
    • Fixed coupon same payment every period
    • Floating-rate note MRR (resets) + credit spread (fixed)
    • Zero-coupon bond no coupons; the discount to par is the interest
  • Seniority Memorize place in the queue in bankruptcy
  • Contingency provisions Use it embedded call, put or conversion option
Securities by tenor at issue
Fixed-income securityclassified by tenor when first issued
  • Money market security Memorize one year or less (T-bills, commercial paper)
  • Capital market security Memorize longer than one year
  • Perpetual bond Use it no maturity date; still debt, not equity
Fixed coupon payment Memorize
C=c×ParmC = \frac{c \times \text{Par}}{m}
Quick example

NOK 300,000 par, 4.4% coupon, paid quarterly (m = 4). 300,000 × 0.044 ÷ 4 = NOK 3,300 a quarter.

On your calculator
  1. 300000×0.044÷4= 3300
  1. 300000ENTER0.044×4÷ 3300

ENTER enter (on the HP, puts the number on the stack)

Floating-rate note coupon Memorize
C=(MRR+s)×ParmC = \frac{(\text{MRR} + s) \times \text{Par}}{m}
Quick example

EUR 80m FRN, MRR 2.10% plus 95 bps, semiannual. (0.0210 + 0.0095) × 80m ÷ 2 = EUR 1,220,000.

On your calculator
  1. 0.021+0.0095×80000000÷2= 1220000
  1. 0.021ENTER0.0095+80000000×2÷ 1220000

ENTER enter (on the HP, puts the number on the stack)

How it is asked

  1. Fixed coupon payment

    NOK 300,000 par, 4.4%, quarterly. Each coupon?

    300,000 × 0.044 ÷ 4 = NOK 3,300. Trap: 13,200 (annual) or 6,600 (÷ 2).

  2. FRN payment

    MRR 2.10% + 95 bps on EUR 80m, semiannual.

    3.05% × 80m ÷ 2 = EUR 1,220,000. Trap: leaving out the spread (840,000).

  3. Match the term sheet line

    "MRR plus 210 bps, paid quarterly" refers to which features?

    Coupon rate and frequency. Not maturity, not a contingency provision.

  4. Classify by tenor

    Ten-year bond with six months left.

    Capital market security (tenor at issue was above one year).

Exam traps

  • Computing the coupon from the price instead of par.
  • Forgetting to divide the annual coupon by the number of payments a year.
  • Classifying by remaining tenor instead of tenor at issue: a 10-year bond with 6 months left is still a capital market security.
  • Thinking the FRN spread resets. Only the MRR resets; the spread is fixed at issue.
  • Treating a perpetual bond as equity. It has contractual cash flows, no votes and ranks ahead of shareholders.

Checkpoint

4 exam-style questions. About 90 seconds each.

  1. 1A CHF 200,000 par bond carries a 3.6% coupon paid quarterly. Each coupon payment is closest to:

  2. 2An issuer pays semiannual interest on a EUR 50 million floating-rate note at MRR + 135 bps. If MRR is 2.40% for the period, the interest payment is closest to:

  3. 3A bond issued with a 10-year maturity has six months remaining. It is best described as a:

  4. 4A floating-rate note pays MRR plus 120 bps. At the next reset, MRR rises by 50 bps. The note's coupon rate for the new period:

Key takeaways

  • Issuer, maturity, principal, coupon rate and frequency, seniority and contingency provisions define a bond.
  • Coupon payment = coupon rate × par ÷ payments per year.
  • FRN coupon = MRR (resets) + credit spread (fixed at issue).
  • Zero-coupon bonds pay all their interest as the discount to par.
  • Money market means a tenor of one year or less at issue; capital market means longer.
Fixed coupon payment Memorize
C=c×ParmC = \frac{c \times \text{Par}}{m}
Quick example

NOK 300,000 par, 4.4% coupon, paid quarterly (m = 4). 300,000 × 0.044 ÷ 4 = NOK 3,300 a quarter.

On your calculator
  1. 300000×0.044÷4= 3300
  1. 300000ENTER0.044×4÷ 3300

ENTER enter (on the HP, puts the number on the stack)

Floating-rate note coupon Memorize
C=(MRR+s)×ParmC = \frac{(\text{MRR} + s) \times \text{Par}}{m}
Quick example

EUR 80m FRN, MRR 2.10% plus 95 bps, semiannual. (0.0210 + 0.0095) × 80m ÷ 2 = EUR 1,220,000.

On your calculator
  1. 0.021+0.0095×80000000÷2= 1220000
  1. 0.021ENTER0.0095+80000000×2÷ 1220000

ENTER enter (on the HP, puts the number on the stack)

All Fixed Income formulas, every lesson

Practice exam-style questions on Fixed-Income Instrument Features

Questions about this lesson?

Where this comes back

Questions candidates ask

What are the basic features of a bond?

Issuer, maturity, principal (par value), coupon rate and frequency, seniority and contingency provisions such as call or put options. Together they fix the bond's promised cash flows and where it stands among the issuer's other debts.

How is a floating-rate note coupon calculated?

Add the issuer's fixed credit spread to the market reference rate for the period, then apply that rate to par for the length of the period. A 180 bps spread with a 3.10% reference rate gives a 4.90% annual rate, so 1.225% a quarter.

What is the difference between money market and capital market securities?

Money market securities have a tenor of one year or less when issued, such as Treasury bills and commercial paper. Capital market securities have a longer tenor at issue. The test is the tenor at issue, not the time left.

Spotted an error? Tell us and we will fix it.

  1. The features of a bond
  2. Current yield, yield to maturity and the yield curve
  3. Bond indentures and covenants

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