Bond Quotes

Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Coupon Interest Rate

Determines the Investor’s Periodic Cash Flow

Cash Flow = Interest Payment = Coupon Rate x Par
= .06375 x 1000 = $63.75/Year
Bond Quotes
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Year of Maturity

Determines the Time frame for the Investment

00 = year 2000, therefore in 1995 this is a 5 year investment
Bond Quotes
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Current Yield (%)

Anuual $ Coupon
= 63.75
Current Yield = = .066 = 6.6%
Market Price 966.25
Bond Quotes
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Daily Trading Volume

Bond Quotes
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Daily Closing Market Price

Expressed as a % of Par
$Price = (96x8) +5 = 773/8 divided by 100 times 1000
= $966.25
Bond Quotes
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Change from Previous Day’s Closing Price

 Bond Valuation Model
IBM Bond Timeline:
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

Investor
Investorthat
thatpurchases
purchasesbond
bondtoday
today(1995)
(1995)for
for$966.25
$966.25will
willreceive
receive55
annual
annualinterest
interestpayments
paymentsof
of$63.75
$63.75and
andaa$1,000
$1,000payment
paymentinin55years.
years.
1995 1996 1997 1998 1999 2000

0 1 2 3 4 5

63.75 63.75 63.75 63.75 63.75

1000.00
 Bond Valuation Model
Compute Bond’s Intrinsic Value
1995 1996 1997 1998 1999 2000

0 1 2 3 4 5

63.75 63.75 63.75 63.75 63.75

1000.00
$59.03
$54.66
$50.61
$46.86
$43.39
$1000
(1.08) 5
$680.58
$935.12
Compute
Compute the
theIntrinsic
IntrinsicValue
Value for
for the
the IBM
IBM Bond
Bondgiven
giventhat
that
you
yourequire
requireaa8%
8%return
returnon
onyour
yourinvestment.
investment.
 Bond Valuation Model
Compute Bond’s Intrinsic Value
1995 1996 1997 1998 1999 2000

0 1 2 3 4 5

63.75 63.75 63.75 63.75 63.75

1000.00
$63.75
$63.75Annuity
Annuityfor
for55 years
years
$1000
$1000Lump
LumpSum
Sum in
in55years
years
Vb = I(PV of Annuity) + PV of Par
= 63.75( 1 1
5 ) + 1000
5
.08 .08(1+.08) (1+.08)
= 63.75(3.9927) + 680.58
= 254.54 + 680.58 = 935.12
 Bond Valuation Model
Some Bonds Pay Interest Semi-Annually:
Cur Net
Bonds Yld Vol Close Chg
AMR6¼24 cv 6 91¼ -1½
ATT 8.35s25 8.3 110 102¾ +¼
IBM 63/8 00 6.6 228 965/8 -1 / 8
Kroger 9s99 8.8 74 1017/8 -¼

Source: Wall Street Journal

1995 1996 1997 1998 1999 2000

0 1 2 3 4 5

45 45 45 45 45 45 45 45.00
1000.00
Rather
Ratherthan
thanreceiving
receiving44annual
annualpayments
paymentsof
of $90,
$90,the
the
bondholder
bondholder will
willreceive
receive 4x2
4x2== 88semiannual
semiannual payments
payments
of
of 90÷2=$45.
90÷2=$45.
 Bond Valuation Model
Some Bonds Pay Interest Semi-Annually:
1995 1996 1997 1998 1999 2000

0 1 2 3 4 5

45 45 45 45 45 45 45 45.00
1000.00
Compute
Computethe theIntrinsic
IntrinsicValue
Valuefor
for the
theKroger
Kroger Bond
Bondgiven
given
that
that you
yourequire
requireaa10%
10%return
returnon
onyour
your investment.
investment.
Since interest is received every 6 months, need to use
semi-annual compounding
1 1 1000
Vb = 45( .05 .05(1+.05)
8) +
(1+.05)
8

Semi-Annual 10%
10%
Compounding 22
 Bond Valuation Model
Some Bonds Pay Interest Semi-Annually:
1995 1996 1997 1998 1999 2000

0 1 2 3 4 5

45 45 45 45 45 45 45 45.00
1000.00
Compute
Computethe theIntrinsic
IntrinsicValue
Valuefor
for the
theKroger
Kroger Bond
Bondgiven
given
that
that you
yourequire
requireaa10%
10%return
returnon
onyour
your investment.
investment.
Since interest is received every 6 months, need to use
semi-annual compounding
1 1 1000
Vb = 45( .05 .05(1+.05)
8) +
(1+.05)
8

=45(6.4632) + 676.84
= 290.85 + 676.84 = 967.68
Interest Rate Risk
 Bond Prices fluctuate over Time
• As interest rates in the economy change, required rates on bonds
will also change resulting in investor’s intrinsic values changing
and market prices changing.

Interest
Rates Vb
 Interest Rate Risk
 Bond Prices fluctuate over Time
• As interest rates in the economy change, required rates on bonds will also change
resulting in investor’s intrinsic values changing and market prices changing.

Interest
Rates Vb

Interest
Rates
Vb
 Interest
 Bond Rate over
Prices fluctuate Risk
Time
• When bonds are originally issued, the coupon rate is set to match current prevailing
rates.
• Over time, the prevailing rates may change, but the coupon rate is fixed.
• Resulting in the actual price of the bond changing.

1995 AAA Bonds are currently yielding 6%

Purchase ATT 6s2015 Bond for $1000.00

1 1 1000
Vb = 60( .06
.06(1+.06)
20 ) +
(1+.06)
20

= $1,000
 Interest
1995 RateareRisk
AAA Bonds currently yielding 6%

Purchase ATT 6s2015 Bond for $1000.00

1998 AAA Bonds are currently yielding 9%

If you want to sell the the ATT 6s2015 Bond, it must be priced to
earn the purchaser a competitive rate (required rate = 9%)

1 1 1000
Vb = 60( .09
.09(1+.09)
17 ) +
(1+.09)
17

= $743.69
 Interest
1995 RateareRisk
AAA Bonds currently yielding 6%

Purchase ATT 6s2015 Bond for $1000.00

1998 AAA Bonds are currently yielding 9%

If you want to sell the the ATT 6s2015 Bond, it must be priced to
earn the purchaser a competitive rate (required rate = 9%)
Market Price for ATT6s2015 is now $743.69

2001 AAA Bonds are currently yielding 5%

If you want to sell the the ATT 6s2015

Bond, it must be priced to earn the
purchaser a competitive rate (required
rate = 5%)

1 1 1000
Vb = 60( .05
.05(1+.05)
14) +
(1+.05) = $1,098.99
14
 Interest
1995 RateareRisk
AAA Bonds currently yielding 6%

Purchase ATT 6s2015 Bond for $1000.00

1998 AAA Bonds are currently yielding 9%

If you want to sell the the ATT 6s2015 Bond, it must be priced to
earn the purchaser a competitive rate (required rate = 9%)
Market Price for ATT6s2015 is now $743.69

2001 AAA Bonds are currently yielding 5%

If you want to sell the the ATT 6s2015
Bond, it must be priced to earn the
purchaser a competitive rate (required
rate = 5%)
Market Price for ATT6s2015 is now
$1,098.99
Bond Prices fall during
periods of rising interest
rates and rise during
periods of falling interest
rates.