1 Bond Markets Primarily over-the-counter transactions with dealers connected electronically Extremely large number of bond issues, but generally low daily volume in single issues Makes getting up-to-date prices difficult, particularly on small company or municipal issues Treasury securities are an exception Bond yield information is available online. One good site is Bonds Online Follow the bond search, search/quote center, corporate/agency bonds, and composite bond yields links Observe the yields for various bond types, and the shape of the yield curve.

2 Corporate Bond Price Reporting Coupon rate: 8.375% Coupon payment per year = $83.75 = X 1,000 Bond matures on July 15, 2033 Trading volume = $763,528,000 (Face value of bonds traded) Quoted price: % of face value, so if face value is 1,000, the price is $1, Bond prices are quoted as a percent of par, just as the coupon is quoted as a percent of par. The bonds yield (8.316%) is 362 basis points (3.62%) above the comparable maturity Treasury bond yield (30-year Treasury bond yield). 100 basis points = 1% Current yield = 8.322% Computed as annual coupon divided by current price ($83.75 / $1, = 8.32%)

3 Corporate Bond Price Reporting – Continued How can we determine the yield on GM bond? To do that we use another TI BA II PLUS worksheet – BOND Date entry: mm.ddyy 2 ND BOND 2 ND CLR WORK ENTER (Settlement date.) ENTER (Annual coupon interest rate in percent form.) ENTER (Maturity date.) 100 ENTER (Face value entered as 100. If the bond has a call price it can be set to that.) ACT (ACT is actual day count. Can be changed to 360 by using 2 ND SET) 2/Y (Coupon payment per year. Can be changed to 1/Y by using 2 ND SET) Since we are computing yield (YLD) ENTER (Non-negative price of the bond as a % of face value.) CPT (Go back to YLD to compute.) AI (AI is Accrued Interest as dollar amount per face value amount.) DUR (DUR is Duration of the bond – average time it takes to recover the market price.)

4 Clean and Dirty Price of a Bond How much do you think you will pay for the previous bond per $100 par value? Price a buyer would pay will include Accrued Interest (AI) if a bond is purchased after the last coupon but before the next coupon payment This is because a seller is entitled to receive some of the next coupon payment based on the fraction of six month period she owned it. A quotation excluding AI is called Clean Price What you pay for the bond is called Dirty Price Dirty Price = Clean Price + Accrued Interest Dirty Price = $ $4.142 = $ AI is quite close to / 2 = since we are short by two days to make it a full six month period (1/13/05 vs. 1/15/05) × 178/180 = You pay Dirty Price (Clean Price + AI) to the seller and get the next coupon in two days in full

5 More on Clean and Dirty Price of a Bond Why do dealers quote clean price then? Clean prices excludes price drops of bonds due to a coupon payment. This drop can also be observed for stock when there is a dividend payment. Clean prices change not because of a coupon payment but rather because of a change in general direction of interest rates or a change in the credit quality of borrower

6 Treasury Bond Price Reporting Coupon rate = 9% Matures in November 2018 Bid price (Dealers Bid – dealer is willing to pay) is 145 and 25/32 percent of par value. 145:25 = (145+25/32)% of par value = % of par value If you want to sell $100,000 par value T-bonds, the dealer is willing to pay (100,000) = $145, Ask price (Dealers Ask – dealer is willing to receive) is 145 and 26/32 percent of par value. 145:26 = (145+26/32)% of par value = % of par value If you want to buy $100,000 par value T-bonds, the dealer is willing to sell them for (100,000) = $145, The difference between the bid and ask prices is called the bid-ask spread and it is how the dealer makes money. Note that Ask Price is higher than Bid Price. Why is that? The price changed by 22/32 percent or $ for a $100,000 worth of T-bonds (22/32)% of par. (22/32)% = % and % X $100,000 = $ The yield based on the ask price is 4.51%

7 Treasury Bond Price Reporting – Continued If the date of quotation is January 14, 2005 and exact maturity date is 11/15/2018 what is the yield based on ask price? 2 ND BOND 2 ND CLR WORK ENTER (Settlement date.) ENTER (Annual coupon interest rate in percent form.) ENTER (Maturity date.) 100 ENTER (Face value entered as 100. If the bond has a call price it can be set to that.) ACT (ACT is actual day count. Can be changed to 360 by using 2 ND SET) 2/Y (Coupon payment per year. Can be changed to 1/Y by using 2 ND SET) Since we are computing yield (YLD) ENTER (Non-negative price of the bond as a % of face value.) CPT (Go back to YLD to compute.