Bond Prices and Quotes

Question 1

Priced as % of par

Answer 1

Example: A $1000 par bond quoted at 80 8/32 = 80.25% = $802.50

Question 2

What bonds are quoted % of par

Answer 2

Corp bonds and US gov bonds (because they are term bonds) and munis that are term bonds (because they all have same interest)

Question 3

What is spread value

Answer 3

Dealer bid price - ask price i.e. diff between what they buy for and what they sell for

Bid = Buy, Ask = Sell
NOTE: These prices are from the dealer perspective NOT the investor’s

Question 4

Bonds priced as yield

Answer 4

Yields are typically expressed in bps 1/100 of percentage (.0001)
1 bps = .01% = $.10 (par)
100 bps =1% = $10 (par)
Example: Bond A is yielding 5%

Question 5

What is a bond yield

Answer 5

The yield is the return the investor expects to get on the bond

Question 6

What bonds are quoted based on yield

Answer 6

1. Treasury bills (NOTE: not treasury bonds)
2. Munis that are serial bonds (because they have diff interest rates)

Question 7

Discount vs premium price

Answer 7

Discount is below par
Premium is above par

For bonds quoted by yield
if yield > coupon then its trading at discount
If yield < coupon then its trading at premium
Because on inverse relationship between yield and price

Question 8

Yield terms

Answer 8

Nominal yield = coupon
Current yield = yield for a year (based on current market price)
Yield To Maturity = yield if you keep the bond to maturity date

Question 9

How interest rates impact bond price

Answer 9

There’s an inverse relationship between bond price and interest

As interest rates rise prices fall
As interest rates fall prices rise

Prices change because investors compare the coupon on an existing bond to the coupon on a new bond which is going to be based on current interest rates

Question 10

How to calculate current yield

Answer 10

Current yield = annual interest (based on par) / current market price

Question 11

Relationship between bond yield values

Answer 11

Par: Coupon rate = current yield = YTM
Discount (use < in equation) : Coupon rate < current yield < YTM
Premium (use >) : Coupon rate > current yield > YTM

N.B. Remember the order of the terms in these equations. Figure out the coupon and current yield relationships and use the same operator for YTM

Question 12

Ways of pricing bonds

Answer 12

Priced as Percentage of par
Priced as Yield