Basic Features of a Bond Pay a fixed amount of interest periodically to the holder of record Repay a fixed amount of principal at the date of maturity Bond market is divided by maturity –Money Market - short-term issues that mature within one year –Notes - intermediate-term issues that mature between one and ten years –Bonds - long-term obligations with maturity greater than ten years

Bond Characteristics Intrinsic features –Coupon - yield (interest income) –Maturity - term or serial (municipalities) –Principal value - different from market value –Type of ownership - bearer or registered Types of Issues –Secured (senior) bonds (backed by asset) –Unsecured bonds (debentures) –Subordinated (junior) debentures

Bond Characteristics Indenture provisions Features affecting a bond’s maturity –Callable (call premium): repurchase the bond at a specified call price –Convertible: bondholders have option to exchange each bond for a specified number of shares of common stock. –Put provision (putable bonds): bondholders have the option to retire the bond.

Rates of Return on Bonds where: HPR i,t = the holding period for bond i during the period t P i,t+1 = the market price of bond i at the end of period t P i,t = the market price of bond i at the beginning of period t Int i,t = the interest payments on bond i during period t

The Global Bond-Market Structure Participating issuers –1. Federal governments –2. Agencies of the federal government –3. State and local political subdivisions (municipalities): Convert the tax-free yield of a municipal bond selling close to par to an equivalent taxable yield (ETY) –4. Corporations –5. International issues Foreign bonds Eurobonds

Equivalent Taxable Yield Where: i = coupon rate of the municipal obligations T = marginal tax rate of the investor

Obtaining Information on Bonds Less emphasis on fundamental analysis Most bond investors rely on rating agencies for credit analysis Market and economic conditions Intrinsic bond features

Sources of Bond Quotes Bank and Quotation Record The Blue List of Current Municipal Offerings Wall Street Journal Barron’s

Interpreting Bond Quotes Quoted on basis of yield or price Price quotes are percentage of par –98 1/2 is not $98.50 but 98.5% of par –A municipal $5,000 bond quoted at 98 1/2 would be $4,925

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T 8.125% coupon rate

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T 8.125% coupon rate matures in 2022

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7%

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7% 52 of these bonds traded that day

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7% 52 of these bonds traded that day The closing price was / 8 % of par

Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 8 1 / / / 4 Issued by AT&T 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7% 52 of these bonds traded that day The closing price was / 8 % of par which was up 1/4 from the prior day

Corporate Bond Quotes Notations –“cv” = convertible –“zr” = zero coupon –“dc” = deep discount (at time of issue) Accrued interest must be added to price quoted (the prorated share of the upcoming semiannual coupon)

Treasury and Agency Bond Quotes GOVT. BONDS & NOTES Maturity Ask Rate Mo/Yr Bid Asked Chg. Yld. 5 5 / 8 Dec 99n 100:08 100:10 …. 5.04

Treasury and Agency Bond Quotes GOVT. BONDS & NOTES Maturity Ask Rate Mo/Yr Bid Asked Chg. Yld. 5 5 / 8 Dec 99n 100:08 100:10 … Prices are in 32nds usually with a very small spread between bid and ask

Practice Questions 1. An investor in the 28% tax bracket is trying to decide which of two bonds to choose. One is a corporate bond with 8% coupon rate at par. The other is a municipal bond with a 5.5% coupon selling at par. 2. What’s the price for: –1. A 15-yr zero coupon bond with a YTM of 12% –2. A 20-yr zero coupon bond with a YTM of 10%