Bond Markets

1
Bond Markets

• Primarily over-the-counter transactions with
  dealers connected electronically
• Extremely large number of bond issues, but
  generally low daily volume in single issues
• Makes getting up-to-date prices difficult,
  particularly on small company or municipal issues
• Treasury securities are an exception
• Bond yield information is available online. One
  good site is Bonds Online
• http//www.bondsonline.com/
• Follow the bond search, search/quote center,
  corporate/agency bonds, and composite bond
  yields links
• Observe the yields for various bond types, and
  the shape of the yield curve.

2
Corporate Bond Price Reporting

• Coupon rate 8.375
• Coupon payment per year 83.75 0.08375 X
  1,000
• Bond matures on July 15, 2033
• Trading volume 763,528,000 (Face value of
  bonds traded)
• Quoted price 100.641 of face value, so if face
  value is 1,000, the price is 1,006.41.
• Bond prices are quoted as a percent of par, just
  as the coupon is quoted as a percent of par.
• The bonds yield (8.316) is 362 basis points
  (3.62) above the comparable maturity Treasury
  bond yield (30-year Treasury bond yield).
• 100 basis points 1
• Current yield 8.322
• Computed as annual coupon divided by current
  price (83.75 / 1,006.41 8.32)

3
Corporate Bond Price Reporting Continued

• How can we determine the yield on GM bond?
• To do that we use another TI BA II PLUS worksheet
  BOND
• Date entry mm.ddyy
• 2ND BOND
• 2ND CLR WORK
• 01.1305 ENTER (Settlement date.)
• 8.375 ENTER (Annual coupon interest rate in
  percent form.)
• 07.1533 ENTER (Maturity date.)
• 100 ENTER (Face value entered as 100. If the
  bond has a call price it can be set to that.)
• ACT (ACT is actual day count. Can be changed
  to 360 by using 2ND SET)
• 2/Y (Coupon payment per year. Can be changed
  to 1/Y by using 2ND SET)
• Since we are computing yield (YLD)
• 100.641 ENTER (Non-negative price of the bond as
  a of face value.)
• CPT (Go back to YLD to compute.)
• AI (AI is Accrued Interest as dollar amount
  per face value amount.)
• DUR (DUR is Duration of the bond average
  time it takes to recover the market price.)

4
Clean and Dirty Price of a Bond

• How much do you think you will pay for the
  previous bond per 100 par value?
• Price a buyer would pay will include Accrued
  Interest (AI) if a bond is purchased after the
  last coupon but before the next coupon payment
• This is because a seller is entitled to receive
  some of the next coupon payment based on the
  fraction of six month period she owned it.
• A quotation excluding AI is called Clean Price
• What you pay for the bond is called Dirty Price
• Dirty Price Clean Price Accrued Interest
• Dirty Price 100.641 4.142 104.783
• AI is quite close to 8.375 / 2 4.1875 since we
  are short by two days to make it a full six month
  period (1/13/05 vs. 1/15/05)
• 4.1875 178/180 4.141
• You pay Dirty Price (Clean Price AI) to the
  seller and get the next coupon in two days in full

5
More on Clean and Dirty Price of a Bond

• Why do dealers quote clean price then?
• Clean prices excludes price drops of bonds due to
  a coupon payment.
• This drop can also be observed for stock when
  there is a dividend payment.
• Clean prices change not because of a coupon
  payment but rather because of a change in general
  direction of interest rates or a change in the
  credit quality of borrower

6
Treasury Bond Price Reporting

• Coupon rate 9
• Matures in November 2018
• Bid price (Dealers Bid dealer is willing to
  pay) is 145 and 25/32 percent of par value.
• 14525 (14525/32) of par value 145.78125
  of par value
• If you want to sell 100,000 par value T-bonds,
  the dealer is willing to pay 1.4578125(100,000)
  145,781.25
• Ask price (Dealers Ask dealer is willing to
  receive) is 145 and 26/32 percent of par value.
• 14526 (14526/32) of par value 145.8125 of
  par value
• If you want to buy 100,000 par value T-bonds,
  the dealer is willing to sell them for
  1.458125(100,000) 145,812.50
• The difference between the bid and ask prices is
  called the bid-ask spread and it is how the
  dealer makes money.
• Note that Ask Price is higher than Bid Price.
  Why is that?
• The price changed by 22/32 percent or 687.50 for
  a 100,000 worth of T-bonds (22/32) of par.
• (22/32) 0.6875 and 0.6875 X 100,000
  687.50.
• The yield based on the ask price is 4.51

7
Treasury Bond Price Reporting Continued

• If the date of quotation is January 14, 2005 and
  exact maturity date is 11/15/2018 what is the
  yield based on ask price?
• 2ND BOND
• 2ND CLR WORK
• 01.1405 ENTER (Settlement date.)
• 9.000 ENTER (Annual coupon interest rate in
  percent form.)
• 11.1518 ENTER (Maturity date.)
• 100 ENTER (Face value entered as 100. If the
  bond has a call price it can be set to that.)
• ACT (ACT is actual day count. Can be changed
  to 360 by using 2ND SET)
• 2/Y (Coupon payment per year. Can be changed
  to 1/Y by using 2ND SET)
• Since we are computing yield (YLD)
• 145.8125 ENTER (Non-negative price of the bond as
  a of face value.)
• CPT (Go back to YLD to compute.