1. V: Bonds 13: Buying and Selling Bonds

2. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 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. Chapter 13: Buying and Selling Bonds Treasury Notes & Bonds © Oltheten & Waspi 2012

4. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Treasury Notes & Bonds  Buy $1,000,000 T-Note maturing August 15, 2013.  Settlement is T+1  The note is purchased June 12  for settlement June 13, 2012.  The price is quoted at 98.75  Priced to actual days (365 or 366)

5. Chapter 13: Buying and Selling Bonds Pricing June 13, 2012 $1,030,000 Aug 15, 2013 $30,000 Feb 15, 2013Aug 15, 2012 Feb 15, 2012 1 semi-annual period =182 days 63 days119 days 2012 is a leap year © Oltheten & Waspi 2012

6. Chapter 13: Buying and Selling Bonds Pricing Seller owns the bond for 119 days Buyer owns the bond for 63 days © Oltheten & Waspi 2012

7. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 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. Chapter 13: Buying and Selling Bonds Accounting June 13, 2012 [ Buy $1m 6% 8/15/13 bond ] Investments987,500.00 Interest receivable19,615.38 Cash1,007,115.38 © Oltheten & Waspi 2012

9. Chapter 13: Buying and Selling Bonds Pricing June 13, 2012 $30,000 Aug 15, 2012 63 days -$987,500.00 $10,384.62 $19,615.38 $30,000.00 -$19,615.38 -$1,007,115.38 I already paid the seller his share so I get to keep the entire $30,000. © Oltheten & Waspi 2012

10. Chapter 13: Buying and Selling Bonds Pricing June 13, 2012 $1,030,000 Aug 15, 2013 $30,000 Feb 15, 2013Aug 15, 2012 63 days © Oltheten & Waspi 2012

11. Chapter 13: Buying and Selling Bonds Accounting © Oltheten & Waspi 2012 June 13, 2012 [ Buy $1m 6% 8/15/13 bond ] Investments987,500.00 Interest receivable19,615.38 Cash1,007,115.38 August 15, 2012 [ Coupon Payment on $1m 6% 8/15/13 bond ] Cash30,000.00 Interest receivable19,615.38 Interest earned10,384.62

12. Chapter 13: Buying and Selling Bonds Pricing © Oltheten & Waspi 2012

13. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Yield to Maturity  Accrued Interest affects the  Yield calculations  Duration (which we do in chapter 15)

14. Chapter 13: Buying and Selling Bonds Yield to Maturity June 13, 2012 $30,000 Feb 15, 2013Aug 15, 2012 Feb 15, 2012 This can't be right: the calculation takes the $30,000 back to Feb 15, 2012 X © Oltheten & Waspi 2012

15. Chapter 13: Buying and Selling Bonds Yield to Maturity June 13, 2012 $1,030,000 Aug 15, 2013 $30,000 Feb 15, 2013Aug 15, 2012 63 182 1 semi-annual period © Oltheten & Waspi 2012

16. Chapter 13: Buying and Selling Bonds Yield to Maturity © Oltheten & Waspi 2012

17. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Calculator Techniques  Calculate Price /Yield  Calculate number of days Financial Markets … and the instruments that Trade in them 2006

18. Chapter 13: Buying and Selling Bonds Calculator Techniques  SDT = 6.13.12  CPN = 6 (%)  RDT = 8.15.13  RV = 100 (%)  ACT  2/Y  PRI = 98.75 (%)  [CPT]  YLD =  AI = © Oltheten & Waspi 2012

19. Chapter 13: Buying and Selling Bonds Calculator Techniques  [2nd] [DATE]  DT1 = 2.15.12  DT2 = 6.13.12  DBD =  ACT  [CPT]  DBD = Including February 29 © Oltheten & Waspi 2012

20. Chapter 13: Buying and Selling Bonds Corporate Bonds © Oltheten & Waspi 2012

21. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Pricing  Buy $1,000,000 Discovery Café bond maturing August 15, 2013.  Settlement is T+3  The note is purchased June 10  for settlement June 13, 2012.  The price is quoted at 98.75  Priced to 360 days in a year

22. Chapter 13: Buying and Selling Bonds Pricing June 13, 2012 $1,030,000 Aug 15, 2013 $30,000 Feb 15, 2013Aug 15, 2012 Feb 15, 2012 Feb 15 to June 13 = (30-15)+30+30+30+13 = 118 June 13 to August 15 = (30-13)+30+15 = 62 1 semi-annual period =180 days 62 days118 days © Oltheten & Waspi 2012

23. Chapter 13: Buying and Selling Bonds Pricing Seller owns the bond for 118 days Buyer owns the bond for 62 days © Oltheten & Waspi 2012

24. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Pricing – Accrued Interest  The seller’s share is paid at the time of purchase Bond PriceCorporateTreasury 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

25. Chapter 13: Buying and Selling Bonds Yield to Maturity June 13, 2012 $1,030,000 Aug 15, 2013 $30,000 Feb 15, 2013Aug 15, 2012. 62. 180 1 semi-annual period © Oltheten & Waspi 2012

26. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 360 Day Pricing  If there are 360 days in the year  We count February 29 and 30 but not January 31  What do we do when the settlement date is October 31?

27. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 360 Day Pricing  In the US the 31st of the month is counted as the first of the next month  In Europe the 31st of the month is counted as the 30th of the month

28. Chapter 13: Buying and Selling Bonds 360 Day Pricing Nov 1 Oct 31Nov 2Oct 30Oct 29 Nov 1 Oct 30 © Oltheten & Waspi 2012

29. Chapter 13: Buying and Selling Bonds EXCEL  Excel functions  PRICE ()  YIELD ()  DURATION ()  COUPNCD  (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) © Oltheten & Waspi 2012

30. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 EXCEL Excel Codes 0 (default)30/360American Corporate Bonds 1actual/actualUS Treasuries 2actual/360 3actual/365 430/360European Corporate Bonds

31. Chapter 13: Buying and Selling Bonds Financial Modeling 13-1 © Oltheten & Waspi 2012

32. Chapter 13: Buying and Selling Bonds Financial Modeling 13-1 © Oltheten & Waspi 2012