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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?
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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)
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
AccountingJune 13, 2012 [Buy $1m 6% 8/15/13 bond]
Investments 987,500.00
Interest receivable 19,615.38
Cash 1,007,115.38
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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.
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
Pricing
June 13, 2012
$1,030,000
Aug 15, 2013
$30,000$30,000
Feb 15, 2013Aug 15, 2012
63 days
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
AccountingJune 13, 2012 [Buy $1m 6% 8/15/13 bond]
Investments 987,500.00
Interest receivable 19,615.38
Cash 1,007,115.38
August 15, 2012 [Coupon Payment on $1m 6% 8/15/13 bond]
Cash 30,000.00
Interest receivable 19,615.38
Interest earned 10,384.62
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
Yield to Maturity
Accrued Interest affects the Yield calculations Duration (which we do in chapter 15)
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
Calculator Techniques
Calculate Price /Yield Calculate number of days
Financial Markets … and the instruments that Trade in them 2006
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
Calculator Techniques
SDT = 6.13.12 CPN = 6 (%) RDT = 8.15.13 RV = 100 (%)
ACT 2/Y
PRI = 98.75 (%)
[CPT] YLD = AI =
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
Calculator Techniques
[2nd] [DATE]
DT1 = 2.15.12 DT2 = 6.13.12 DBD = ACT
[CPT] DBD =
Including February 29
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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?
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
360 Day Pricing
Nov 1Oct 31 Nov 2Oct 30Oct 29
Nov 1
Oct 30
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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)
Chapter 13: Buying and Selling Bonds © Oltheten & Waspi 2012
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
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