1. Business Math JOHN MALL JUNIOR/SENIOR HIGH SCHOOL

2. Buying Bonds

3.  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

4.  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)

5.  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)

6.  To find a bond’s market price, multiply its par value by the percent.  If the price of a $500 par value bond is 102.182% of $500, or 510.91. This bond is selling at a premium Buying Bonds

7.  Markie Bonds are selling at 97.223. What is the price of one of school’s @1,000 bonds? Are these bonds selling at a discount or at a premium?  97.223 = 0.97223 x$1,000 = $972.23 market price  It is selling at a discount Example

8.  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

9.  Jerome bought 10, $1,000 Regis Inc. bonds at 104.113 from a broker. What was Jerome’s total investment?  Convert the market price to decimal value and multiply by the par value  104.113 = 1.04113 x $1,000 = $1,041.13 Market price of 1 bond  Multiply the total price of 1 bond by the number of bonds bought  10 x $1,041.13 = $10,411.30 Total Investment Example

10. Bond Interest

11.  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

12.  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

13.  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

14.  What is the current yield on $1,000, 7% Elgin Transit Company bond priced at 96.462. .07 x $1,000 = $70 Bond Income  Multiply the bond’s face value times the bond price  96462 x $1,000 = $964.62  Divide the annual income by the bond price  $70 / $964.62 =.0725 or 7.25% current yield Example

15.  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

16.  Ed buys 5, $1,000, 8% bonds through a dealer at 102.797 plus accrued interest of$20 per bond.  The dealer charged $3 commission per bond. What is the total cost of the bonds to Ed?  (102.797% ) 1.02797 x $1,000 = $1,027.97 Price of One Bond  $1,027.97 + 20 + 3 = $1,050.97 Cost of Each Bond  5 x $1,050.97 = $5,254.85 Total Cost of Bond Purchase Example