V: Bonds 13: Buying and Selling Bonds. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Buying and Selling Bonds Treasury Notes & Bonds.

V: Bonds

13: Buying and Selling Bonds

Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012

Buying and Selling Bonds

Treasury Notes & Bonds Settlement T+1 Actual

Corporate Bonds Settlement T+3 360

What do we do with the other 5 (or 6) days in the year?


Treasury Notes & Bonds


Treasury Notes & Bonds

Buy $1,000,000 T-Note maturing August 15, 2013.

Settlement is T+1 The note is purchased June 12 for settlement June 13, 2012.

The price is quoted at 98.75 Priced to actual days (365 or 366)


Pricing

June 13, 2012

$1,030,000

Aug 15, 2013

$30,000$30,000$30,000

Feb 15, 2013Aug 15, 2012Feb 15, 2012

1 semi-annual period=182 days

63 days119 days

2012 is a leap year


Pricing

$30,000.00

10,384.62 $days 182days 63

*$30,000

$19,615.38days 182days 119

*$30,000

Seller owns the bond for 119 days

Buyer owns the bond for 63 days


Pricing – Accrued Interest

The seller’s share is paid at the time of purchase

Bond Price

Base Price: $987,500.00

Accrued Interest: $19,615.38

Invoice Price: $1,007,115.38


AccountingJune 13, 2012 [Buy $1m 6% 8/15/13 bond]

Investments 987,500.00

Interest receivable 19,615.38

Cash 1,007,115.38


PricingJu

ne 1

3, 2

012 $30,000

Aug 15, 201263 days

-$987,500.00

$10,384.62$19,615.38$30,000.00

-$19,615.38-$1,007,115.38

I already paid the seller his share so I

get to keep the entire $30,000.


Pricing

June 13, 2012

$1,030,000

Aug 15, 2013

$30,000$30,000

Feb 15, 2013Aug 15, 2012

63 days


AccountingJune 13, 2012 [Buy $1m 6% 8/15/13 bond]

Investments 987,500.00


Cash 1,007,115.38

August 15, 2012 [Coupon Payment on $1m 6% 8/15/13 bond]

Cash 30,000.00


Interest earned 10,384.62


23-D

ec-1

1

1-Ap

r-12

10-Ju

l-12

18-O

ct-1

2

26-Ja

n-13

6-M

ay-1

3

14-A

ug-1

3

22-N

ov-1

3

93

94

95

96

97

98

99

100

101

102

103

Invoice Price

Base Price

13-Ju

n-12

Pricing


Yield to Maturity

Accrued Interest affects the Yield calculations Duration (which we do in chapter 15)


Yield to Maturity

June 13, 2012

$30,000$30,000

Feb 15, 2013Aug 15, 2012

2Yd

1

$30,000

Feb 15, 2012

This can't be right: the calculation takes the $30,000 back to

Feb 15, 2012

X


Yield to MaturityJu

ne 1

3, 2

012

$1,030,000

Aug 15, 2013

$30,000$30,000

Feb 15, 2013Aug 15, 2012

days 182days 63

2Yd

1

$30,000

18263

2Yd

1

$30,000

118263

2Yd

1

$1,030,000

2

63182

1 semi-annual period1 semi-annual period


Yield to Maturity

.38$1,007,115

18$948,856.1 0$28,620.28 7$29,638.98

2

430.071187791

$1,030,000

2

430.071187791

$30,000

2

430.071187791

$30,000

182

632

182

631

182

63


Calculator Techniques

Calculate Price /Yield Calculate number of days

Financial Markets … and the instruments that Trade in them 2006



SDT = 6.13.12 CPN = 6 (%) RDT = 8.15.13 RV = 100 (%)

ACT 2/Y

PRI = 98.75 (%)

[CPT] YLD = AI =



[2nd] [DATE]

DT1 = 2.15.12 DT2 = 6.13.12 DBD = ACT

[CPT] DBD =

Including February 29


Corporate Bonds


Pricing

Buy $1,000,000 Discovery Café bond maturing August 15, 2013.

Settlement is T+3 The note is purchased June 10 for settlement June 13, 2012.

The price is quoted at 98.75 Priced to 360 days in a year


Pricing

June 13, 2012

$1,030,000

Aug 15, 2013

$30,000$30,000$30,000

Feb 15, 2013Aug 15, 2012Feb 15, 2012

Feb 15 to June 13 = (30-15)+30+30+30+13 = 118

June 13 to August 15 = (30-13)+30+15 = 62

1 semi-annual period=180 days

62 days118 days


Pricing

$30,000.00

10,333.34 $days 180days 62

*$30,000

$19,666.67days 180days 118

*$30,000

Seller owns the bond for 118 days

Buyer owns the bond for 62 days


Pricing – Accrued Interest

The seller’s share is paid at the time of purchase

Bond Price Corporate Treasury Base Price: $987,500.00 $987,500.00

Accrued Interest: $19,666.67 $19,615.38 Invoice Price: $1,007,166.67 $1,007,115.38

$51.29


days 180days 62

2Yd

1

$30,000

Yield to MaturityJu

ne 1

3, 2

012

$1,030,000

Aug 15, 2013

$30,000$30,000

Feb 15, 2013Aug 15, 2012

18062

2Yd

1

$30,000

118062

2Yd

1

$1,030,000

2

. 62 .180

1 semi-annual period1 semi-annual period


360 Day Pricing

If there are 360 days in the year We count February 29 and 30

but not January 31 What do we do when the settlement date is

October 31?


360 Day Pricing

In the US the 31st of the month is counted as the first of the next month

In Europe the 31st of the month is counted as the 30th of the month


360 Day Pricing

Nov 1Oct 31 Nov 2Oct 30Oct 29

Nov 1

Oct 30


EXCEL

Excel functions PRICE () YIELD () DURATION ()

COUPNCD (next coupon date)

COUPNUM (number of coupons remaining

COUPDAYSBS (days from the last coupon date

to settlement) COUPDAYSNC

(days from settlement to next coupon)

COUPDAYS (days in the coupon period)


EXCEL

Excel Codes

0 (default) 30/360 American Corporate Bonds

1 actual/actual US Treasuries

2 actual/360

3 actual/365

4 30/360 European Corporate Bonds


Financial Modeling 13-1


Financial Modeling 13-1

V: Bonds 13: Buying and Selling Bonds. Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012 Buying and Selling Bonds Treasury Notes & Bonds.

Documents