1. 13: Buying and Selling Bonds
V: Bonds
13: Buying and Selling Bonds

2. Buying and Selling Bonds
Treasury Notes & Bonds
Settlement T+1
Actual
Corporate Bonds
Settlement T+3
360
What do we do with the other 5 (or 6) days in the year?

3. Treasury Notes & Bonds
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4. Treasury Notes & Bonds Buy $1,000,000 T-Note maturing August 15, 2017.
Settlement is T+1
The note is purchased June 12
for settlement June 13, 2016.
The price is quoted at 98.75
Priced to actual days (365 or 366)

5. Pricing 2016 is a leap year Feb 15, 2016 Aug 15, 2016 Feb 15, 2017
$30,000
$30,000
$30,000
$1,030,000
119 days
63 days
June 13,
1 semi-annual period
=182 days
2016 is a leap year
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6. Pricing Seller owns the bond for 119 days
Buyer owns the bond for 63 days
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7. Pricing – Accrued Interest
The seller’s share is paid at the time of purchase
Bond Price
Base Price:
$987,500.00
Accrued Interest:
$19,615.38
Invoice Price:
$1,007,115.38

8. Accounting June 13, 2016 [Buy $1m 6% 8/15/13 bond] Investments
987,500.00
Interest receivable
19,615.38
Cash
1,007,115.38
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9. Pricing 63 days Aug 15, 2016 $30,000 June 13, 2016 $10,384.62
I already paid the seller his share so I get to keep the entire $30,000.
$30,000
$10,384.62
$19,615.38
$30,000.00
June 13, 2016
-$987,500.00
-$19,615.38
-$1,007,115.38
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10. Pricing 63 days Aug 15, 2016 Feb 15, 2017 Aug 15, 2017 $30,000 $30,000
$1,030,000
63 days
June 13, 2016
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11. Accounting June 13, 2016 [Buy $1m 6% 8/15/13 bond] Investments
987,500.00
Interest receivable
19,615.38
Cash
1,007,115.38
August 15, 2016 [Coupon Payment on $1m 6% 8/15/13 bond]
30,000.00
Interest earned
10,384.62
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12. Yield to Maturity Accrued Interest affects the Yield calculations
Duration (which we do in chapter 15)

13. Yield to Maturity
Aug 15, 2016
Feb 15, 2017
$30,000
$30,000 X
This can't be right: the calculation takes the $30,000 back to Feb 15, 2016
June 13, 2016
Feb 15, 2016
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14. Yield to Maturity 63 182 1 semi-annual period 1 semi-annual period
Aug 15, 2016
Feb 15, 2017
Aug 15, 2017
$30,000
$30,000
$1,030,000
June 13, 2016
63 182
1 semi-annual period
1 semi-annual period
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15. Yield to Maturity
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16. Calculator Techniques
Calculate Price /Yield
Calculate number of days
Financial Markets … and the instruments that Trade in them

17. Calculator Techniques
SDT =
CPN = 6 (%)
RDT =
RV = 100 (%)
ACT
2/Y
PRI = (%)
[CPT]
YLD =
AI =
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18. Calculator Techniques
[2nd] [DATE]
DT1 =
DT2 =
DBD =
ACT
[CPT]
DBD =
Including February 29
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19. Corporate Bonds
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20. Pricing Buy $1,000,000 Discovery Café bond maturing August 15, 2017.
Settlement is T+3
The note is purchased June 10
for settlement June 13, 2016.
The price is quoted at 98.75
Priced to 360 days in a year

21. Pricing Feb 15, 2016 Aug 15, 2016 Feb 15, 2017 Aug 15, 2017 $1,030,000
$30,000
$30,000
$30,000
118 days
62 days
June 13 to August 15
= (30-13) = 62
June 13,
Feb 15 to June 13
= (30-15) = 118
1 semi-annual period
=180 days
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22. Pricing Seller owns the bond for 118 days
Buyer owns the bond for 62 days
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23. Pricing – Accrued Interest
The seller’s share is paid at the time of purchase
Bond Price
Corporate
Treasury
Base Price:
$987,500.00
Accrued Interest:
$19,666.67
$19,615.38
Invoice Price:
$1,007,166.67
$1,007,115.38
$51.29

24. Yield to Maturity . 62 . 180 1 semi-annual period 1 semi-annual period
Aug 15, 2016
Feb 15, 2017
Aug 15, 2017
$30,000
$30,000
$1,030,000
June 13, 2016
1 semi-annual period
1 semi-annual period
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25. 360 Day Pricing If there are 360 days in the year
We count February 29 and but not January 31
What do we do when the settlement date is October 31?

26. Corporate Bond Accrual Rules
1] If (coupon pays at the end of the month and the last coupon date is Feb 28 or 29) then use Feb 30
2] If (the settlement date is the 31st and the last coupon date is 30th or 31st ) then settlement date is the 30th
3] If (the last coupon date is the 31st ) then the last coupon is the 30th
ISDA (f)
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27. Example
Huron Industries 8% Aug 31, priced to yield 3% July 31, 2016.
1] Last coupon date = February 30, 2016
2] Settlement date = July 30, 2016
3] #N/A
Feb 30, 2016
Jul 30, 2016
Aug 31, 2016
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28. EXCEL Excel functions COUPNCD PRICE () COUPNUM YIELD () DURATION ()
(next coupon date)
COUPNUM
(number of coupons remaining
COUPDAYSBS
(days from the last coupon date to settlement)
COUPDAYSNC
(days from settlement to next coupon)
COUPDAYS
(days in the coupon period)
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29. EXCEL Excel Codes 0 (default) 30/360 American Corporate Bonds 1
actual/actual
US Treasuries 2
actual/360 3
actual/365 4
European Corporate Bonds

30. Financial Modeling 13-1
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31. Financial Modeling 13-1
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