Business Math JOHN MALL JUNIOR/SENIOR HIGH SCHOOL

Buying Bonds

 Bonds are a form of long-term promissory note.  Bonds are a written promise to repay the money loaned on the due date.  Bondholders, or the people who own the bonds may keep them until the due date or sell them to other investors. Buying Bonds

 Bonds are usually issued with a face, or par value of $1,000. Bonds may also be issued with other par values, such as $500, $5,000 or $10,000.  Par value is the amount of money that the issuer, or the organization that sells the bonds, agrees to pay the bond holder on the due date. Buying Bonds (continued)

 The market value of a bond is its selling price and may be different from par value. If the market value is more than the par value, the bond is selling at a premium.  If the market value is less than the par value, the bond is selling at a discount.  The amount of the premium or discount is the difference between the market value and the par value.  The market price or market value, of a bond is quoted as a percent of the par value. Buying Bonds (continued)

 To find a bond’s market price, multiply its par value by the percent.  If the price of a $500 par value bond is % of $500, or This bond is selling at a premium Buying Bonds

 Markie Bonds are selling at What is the price of one of bonds? Are these bonds selling at a discount or at a premium?  = x$1,000 = $ market price  It is selling at a discount Example

 Bonds are usually bought and sold through a broker, who is a dealer in stocks and bonds.  Full service brokers provide advice on what and when to buy and sell. They charge a broker’s commission or brokerage fee but the commission is usually included as part of the price the buyer pays for a bond and not shown separately.  Discount and online brokers usually offer less financial help but also charge less commission. Total Investment in Bonds

 Jerome bought 10, $1,000 Regis Inc. bonds at from a broker. What was Jerome’s total investment?  Convert the market price to decimal value and multiply by the par value  = x $1,000 = $1, Market price of 1 bond  Multiply the total price of 1 bond by the number of bonds bought  10 x $1, = $10, Total Investment Example

Bond Interest

 Investors in bonds receive interest payments as income.  Bond interest is often paid semiannually.  The rate of a bond is based on the bond’s par value.  Since the par value is the principal, the interest formula is:  Par Value x Rate x Time = Interest Bond Income

 Find the interest for one year on 5, $1,000 par value, 9% bonds  $1,000 x.09 x 1 = $90 interest for 1 Year on 1 bond  5 x $90 = $450 interest for 1 year on 5 bonds  If the interest is paid semiannually, the amount of each interest payment for this bond would be:  $1,000 x.09 x.5 = $45 Semiannual interest on 1 bond.  5 x $90 x.5 = $225 Semiannual interest on 5 bonds Example

 One way to compare bond investments is to find the current yield of bonds.  The current yield of a bond is found by dividing the bond’s annual interest income by the bond’s price.  Current Yield = Annual Income + Bond Price Bond Yields

 What is the current yield on $1,000, 7% Elgin Transit Company bond priced at .07 x $1,000 = $70 Bond Income  Multiply the bond’s face value times the bond price  x $1,000 = $  Divide the annual income by the bond price  $70 / $ =.0725 or 7.25% current yield Example

 When a bond is sold, whoever owns the bond on the next interest date receives the full amount of interest for the entire past interest period.  When you buy a bond, you may have to pay the market price of the bond plus any interest that the bond has earned for the last month interest date. Total Cost of Bonds

 Ed buys 5, $1,000, 8% bonds through a dealer at plus accrued interest of$20 per bond.  The dealer charged $3 commission per bond. What is the total cost of the bonds to Ed?  ( % ) x $1,000 = $1, Price of One Bond  $1, = $1, Cost of Each Bond  5 x $1, = $5, Total Cost of Bond Purchase Example