One Is Net, One Is Gross

Rule 22 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

A taxable yield is shared with the tax authority. A tax-exempt yield is kept. Ranking them needs one adjustment. NOT a property of the bond alone.

The trick

Common trap: Muni yield times one minus the rate. Correct: Muni yield divided by one minus the rate. The answer must be bigger.

The method for this kind of question

One division, both directions

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

Where does the boundary between investment-grade and high-yield ratings sit, per the two major agencies' scales?

A. Baa/BBB and above is investment grade; the next rung down is high yield B. A/A and above is investment grade; Baa/BBB and below is high yield C. Investment grade has no defined boundary; it is a marketing term only D. High yield means a higher stated coupon by definition, regardless of rating

How sure are you?

Sure Fairly sure Guessing

Correct: A. Baa or BBB or better is investment grade; below that line is high yield.

B. A/A sits one full rating category above the actual boundary, overstating where investment grade ends.

C. The boundary is a defined ratings line, not a marketing term.

D. High yield describes a bond with a higher risk of default; it pays more precisely because that risk is higher, not by an unrelated coupon definition.

Unit: SIE outline 2.1.2

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