Bond Points and basis Poin

Question 1

How are bonds “quoted” in the market?

Answer 1

They are quoted in terms of their price and their yield to maturity

Question 2

What does a bond quote mean?

Answer 2

It means the price at which the bond is trading i.e. its market price

Question 3

How is the market price for bonds quoted?

Answer 3

As a percentage of the bond’s par value expressed in terms of bond points.

Question 4

How much is 10 bond points?

Answer 4

It is 10% of the par value. 1 bond point will be equal to 1% of the par value, i.e. $10

Question 5

What is the market price for a bond quoted at 97 1/8

Answer 5

It will be 97.125% of the par value or 971.25 i.e. $1000*97.125

Question 6

What will be the market price for a premium bond quoted at 101 3/8?

Answer 6

101.375% of par or $1013.75(1000*1.01375)

Question 7

How is bond’s yield to maturity expressed?

Answer 7

It is expressed in terms of basis points. A basis point equals one hundredth of a percentage point and it represents the smallest increment change in the bond’s yield.

Question 8

One hundred basis points is ?

Answer 8

1%

Question 9

25 basis points is ?

Answer 9

0.25%

Question 10

So when a bond’s yield to maturity increases from 4.25% to 4.79%, the bond yield is said to have increased by _ basis points?

Answer 10

54 basis points. 4.79-4.25= 0.54% or 54 basis points

Question 11

What does this bond notation mean?

Answer 11

ABC-name of the bond
6s- 6% yield semi-annually
2024- the year that bond matures
5.7% current yield
the volume traded the day before is 20 i.e. $20,000
Close - 1053/8 i.e. at 1053.75
Net change - an increase of 1/4 of a bond point, i.e. $2.50( remember 1 bond point s= $10)

Question 12

What does “an investor sells 5M of bonds,” mean?

Answer 12

Investor has sold $5000 worth of bonds or 5 $1000 bonds.

Question 13

What is “M” & “MM” used to represent in finance?

Answer 13

M = $1000
MM= $1 million dollars

Question 14

What does 6.00s 2024 at 105 mean?

Answer 14

It means that bond is selling at 105% of par therefore it was sold at a premium.

Question 15

What is a yield spread?

Answer 15

Difference between a bond’s yield and a benchmark yield

Question 16

Yield spreads are also called _________?

Answer 16

Credit spreads

Question 17

What is the common benchmark yield and why?

Answer 17

U.S. Treasury security.

It is perceived to be virtually risk-free.

Question 18

If the 10-year Treasury note currently yields 1% and the 10-year corporate bond yields 5%, what will be the yield spread?

Answer 18

4%

Question 19

If the 10-year Treasury note currently yields 1% and the 10-year corporate bond yields 5%, the yield spread is 4%. What does this mean?

Answer 19

This means to attract buyers for your corporate bond, the issuer has to offer one with the yield being 4% or 400 basis points more than U.S. Treasury security.

Question 20

What happens if the yield on the corporate bond declines to 3%?

Answer 20

The yield spread or risk premium declines to 2%.

Question 21

When credit spreads widen, the value of _______ bonds decreases more than that of ______ bonds.

Answer 21

Lower grade, higher grade

Question 22

when a yield spread widens, it means ?

Answer 22

The investors are less confident in the issuer’s ability to continue making interest payments. This is a -ve sign for the economy and suggest that a contaction is coming.

Question 23

When credit spreads narrow, the value of lower-grade bonds _____ more than that of higher-grade bonds.

Answer 23

Increases

Question 24

A narrowing in the yield spread means?

Answer 24

Bond investors are more confident the corporate issuer will not default.