I have a question with interpreting the bond table. There are several columns describing a bond's information and the most important are the $Bid and the Yield%.
1. I am aware that the $Bid value is quoted in relation to 100, like a percentage; but what does this really mean?
2. I know the yield % is not the current yield but instead it is the YTM (yield to maturity); How do i use this information to help me interpret the bond value?
For example, if a bond's $Bid is 106.55 and its Yield% is 6.04, is this bad or good? Is it bad b/c the the bond price has risen, therefore suggesting the yield % will decrease?
How do i use the yield% of 6.04 to analyze if i should keep or sell the bond?? I don't know which bond guide you are reading so I will assume Corporate Bonds and Treasuries.
1. Corporate Bonds are typically quoted on a spread basis, i.e. spread to Treasuries, this bond trades at 150 basis points over treasuries (or Treasuries plus 150 bp). When the spread gets too large, the bonds get quoted on a dollar basis as in dollar price. So when you see 70 "dollar price", that means the bonds now trade at 70 cents on the dollar or like a percentage.
When you see percentage, think dollar price, i.e. 107 "dollar price" means you can get $107 for every $100 par value. Unless you trade bonds and can do bond math, it's very difficult to discern the price of a bond using a spread. In the case of Treasuries, there is no spread.
2. The Yield to Maturity (YTM) reflects the remaining coupon payments and assumes the bond gets redeemed at par and those cash flows are based off the current price of the bond. One way of thinking about YTM is the weighted-average return of the cash flows.
You need to understand that the rate of return for a bond is it's coupon rate if you bought the bond at par and the bond was redeemed at par. In this special case, the coupon rate is identical to the Yield to Maturity. Therefore, if you bought the bonds at less than par, than you clearly are getting a YTM above the coupon rate. Conversely, if you bought the bonds at a premium, than your YTM is less than the coupon rate.
The YTM is a way to help you equalize the effects of coupons relative to current interest rates and whether the bond trades at a discount or premium.
As a side note, in Corporate bonds, some of these bonds may be callable and the convention is to calculate the Yield to Worst (YTW), i.e. you calculate various YTMs to reflect multiple possible redemption periods. The YTW is the lowest among the YTMs; the YTW is used as the yield because it is when the company will most likely call their bonds.
> "...is this bad or good? Is it bad b/c the the bond price has risen"
Now in your example of a bond whose Bid is $106.55 (by the way, the bid price is the price you want to sell the bonds) with a YTM of 6.04%. The reason the bonds trade above par is because the coupons for that bond far exceeds 6%. Those coupons are very desireable in today's market and investors are willing to pay a premium to own the bond.
> "How do i use the yield% of 6.04"
The 6.04% YTM is also important because it allows you to rank other similar bonds. Assuming bonds will not default, you want the highest yield possible. You can now compare across different bonds by using the YTM to see which bonds will give you the highest possible return while meeting your other objectives (such as duration, credit quality, etc)
I hope this helps. |
