Government officer need $1 million to finance a public program Issuing Debt Instruments

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• Government officer -gt need 1 million to finance
  a public program? ?Issuing Debt Instruments
• Corporate financial manager ? need 1 million to
  finance an attractive investment opportunity ??
  Issuing Debt Instruments
• Mutual fund manager ? ?Invest
• Stocks fixed income securities-bond market

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Chapter 6

• Fixed Income Securities Bond Market

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Chapter 6

• Fixed Income Securities Bond Market

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CHAPTER 6 OVERVIEW

• 6.1 Bond Market Overview
• 6.2 How to Read Bond Tables
• 6.3 Corporate Bonds
• 6.4 U.S. Treasury Securities
• 6.5 Agency and Asset-backed Securities Markets
• 6.6 Money Market
• 6.7 Municipal Bonds
• 6.8 Sources of Bond Market Information

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U.S. Bond Market

• Market value 14.1 trillion
• One of largest securities markets in world
• Quickly reflects changes in credit quality and in
  aggregate economic conditions, including interest
  rates
• Very efficient market mechanism
• Expensive place to trade for small investors

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BOND MARKET RULE 1

• Bond prices vary inversely with changes in
  current interest rates.

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KEY TERMSBond Market

• Bond Dealers
• Bond Issuer
• Bond Investors
• Primary Bond Market
• Secondary Bond Market
• Current Yield
• Holding-Period Risk
• Default Risk
• Federal Funds Rate
• Discount Rate
• Eurodollar Market

• LIBOR
• Par Value
• Round Lot
• Maturity
• CUSIP Number
• Face Amount
• Principal Amount
• Discount to Par
• Premium to Par
• Book Entry Form
• Indenture

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BOND MARKET OVERVIEWThe Players

• Bond promise to pay back principal at some
  future date, plus periodic interest payments for
  use of investors money
• Bond issuers entities that supply new bonds
• Bond investors individuals and institutions that
  purchase bonds for interest income and long-term
  capital gains
• Bond dealers intermediaries between bond issuers
  and investors
• Primary bond market new bonds only
  issuer-to-investor
• Secondary bond market previously issued bonds
  investor-to-investor

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Outstanding Level of U.S. Public Private Debt
Figure 6.1
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U.S. Bond Market at a Glance
Figure 6.4
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Tracking the Bond Market

• Current yield bonds promised interest payment
  divided by current price
• Benchmark for current yield 30-yr U.S. Treasury
  bond
• Benchmark statistic for long-term bonds
• Capture the holding period risk of long-term
  bonds
• Individual bond yields reflect differences in
  term-to-maturity and credit quality
• Market pays premium for holding-period
  riskchance of loss during periods of falling
  bond prices
• Market pays premium for default riskchance of
  nonpayment of interest or principal

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Which Interest Rate Is It?

• Federal Funds Rate overnight bank lending rate
  lowest but most volatile money market rate
• Discount Rate interest rate charged by the
  Federal Reserve to its member banks key
  instrument of monetary policy
• Eurodollar Rate interest rate charged for
  dollar-denominated loans in European banks
• LIBOR London Interbank Offered Rates London fed
  funds rate

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Bond Trading Activity

• Largely an OTC marketno primary physical
  location
• Low trading volume relative to stocks
• Par value face amount, usually 1,000

• Round lot 1 million of par value
• Relatively illiquid for small investors

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Bond OwnershipEstimated Ownership of U.S.
Treasury Securities by Private Investors
Figure 6.5
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KEY TERMS How To Read Bond Tables

• Maturity time when bond principal and all
  interest will be paid in full
• CUSIP Committee on Uniform Security
  Identification Proceduresunique code for each
  issue
• Use this code to obtain specific bond-pricing
  information on the Bond Market Associations
  Investor Website on the Internet at
  http//www.bondmarket.com
• Coupon Rate rate promised based on par value or
  face amount of bond principal
• Term-to-Maturity years remaining until maturity

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Current Price vs. Par Value

• Discount to Par mark down from par valueused
  for short term securities in place of interest
  payments and for interest-bearing securities to
  equalize yield to maturity for similar risk
  classes
• Premium to Par market price that pays over the
  face value to equalize yield to maturity for
  similar risk classes

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How To Read Bond TablesCorporate Bonds Table 6.1
Panel A

• Corporate Bonds
• Bonds Cur Vol Close Net Chg.
• Yield
• BosCelts 6s 38 11.3 2 53
  -
• Bond-issuing company? The Boston Celtics
• Coupon rate for BosCelts? 6? as a percentage of
  1000, the bonds par value.
• The Celttics Bond pays 6 interest per year.
• Interest payments 10006 60.
• Current yield? annual interest/current market
  price
• 60/530 11.3
• Whats the dollar price of the Boston Celtics
  bond?
• 53 represents 53 of the par value(face value)
  ?531000530
• Vol. ? The volume traded the prior day ? Here 2
  means the volume traded the prior day equals 2
  1000 2000 in the face value, or two bonds.
• Net Chg. ? - means the bond price was
  unchanged.

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How To Read Bond TablesCorporate Bonds Table 6.1
Panel A

• Corporate Bonds
• Bonds Cur Vol Close Net Chg.
• Yield
• IBM 8.38 19 7.7 43 108.88 7/8
• Bond-issuing company?
• Coupon rate for IBM ? ?
• The IBM Bond pays ? interest per year.
• Interest payments 1000??.
• Current yield? annual interest/current market
  price
• ?/? ?
• Whats the dollar price of the IBM Bond ?
• 108.88 represents 108.88 of the par value(face
  value) ?108.881000?
• Vol. ? The volume traded the prior day ? Here 43
  means the volume traded the prior day equals 43
  1000 43000 in the face value, or two bonds.
• Net Chg. ? 7/8 means the bond price was
  up(7/8) of the face value, 0.875 1000
  8.75, for the day.

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How To Read Bond TablesTreasury Bonds Table 6.1
Panel B

• Treasury Bonds
• Rate Maturity Bid Ask Chg.
  Ask Yield
• 5.88 Nov 04 9709 9710 13 6.54
• Coupon rate?5.88
• The par value is 1000 and this bond will have
  annual coupon payments of 58.8 per
  year(5.881000) in the form of two semiannual
  payments of 29.4 each November and May.
• Maturity? This bond is due November 2004. This
  bond will have semiannual coupon payments of
  29.4 each November and May.
• 29.4 (5.881000)/2
• Whats the dollar price of this bond? Prices are
  quoted as a percentage of the par the numbers to
  the right of the colon are 1/32 of a point.
• If you want to sell this bond, the bid price is
  97 9 /32 of the par value(face value)
  97.281251000972.8125
• If you want to buy this bond, the asking price
  is 97 10 /32 of the par value(face value)
  97.31251000973.125
• Chg.? 13 ? The bond price is up (13/32) of the
  face value, that is 0.4062 1000 4.62
• Ask yield?
• The bonds yield to maturity based on the ask
  price. If you bought this bond for 973.125 and
  held it to maturity, you would make a 6.54
  return.

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How To Read Bond TablesTreasury Bonds Table 6.1
Panel B

• Treasury Bonds
• Rate Maturity Bid Ask Chg.
  Ask Yield
• 6.25 May3 0 10120 10121 3 6.13
• Coupon rate?
• The par value is 1000 and this bond will have
  annual coupon payments of _____ per
  year(____1000) in the form of two semiannual
  payments of ___ each _____ and ______.
• Maturity? This bond is due ______. This bond will
  have semiannual coupon payments of _____ each
  _____ and ______.
• _____ (_____1000)/2
• Whats the dollar price of this bond? Prices are
  quoted as a percentage of the par the numbers to
  the right of the colon are 1/32 of a point.
• If you want to sell this bond, the bid price is
  ______ of the par value(face value)
  ________1000_______
• If you want to buy this bond, the asking price
  is __________ of the par value(face value)
  ______1000__________
• Chg.? 3 ? The bond price is up (____) of the
  face value, that is_____ 1000 ______
• Ask yield?
• The bonds yield to maturity based on the ask
  price. If you bought this bond for _______ and
  held it to maturity, you would make a _______
  return.