1. 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. 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. 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 2 ND BOND 2 ND 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 2 ND SET) 2/Y (Coupon payment per year. Can be changed to 1/Y by using 2 ND 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. 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. 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. 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. 145:25 = (145+25/32)% 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. 145:26 = (145+26/32)% 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. 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? 2 ND BOND 2 ND 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 2 ND SET) 2/Y (Coupon payment per year. Can be changed to 1/Y by using 2 ND 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.