All About Interest
by Mark Lawrence
Mark's Market Blog
Blog Table of Contents
Portfolios & Risk
What is money?
Interest and Growth
Money Utility and Risk
Trade Deficits and Inflation
Distribution of Income
Distribution of Wealth
Zero Coupon Bonds
Reading Bond Pages
Risk & Volatility
About This Site
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Below is a listing of some of the available bonds. This listing is from Yahoo.com. The data is real live data from 9/9/05.
|Type||Issue||Price||Coupon %||Maturity||YTM %||Current Yield %||Rating||Callable|
|Corp||DELTA AIR LINES INC DEL||24.44||7.700||15-Dec-2005||1164.039||31.508||CC||No|
|Corp||DELTA AIR LINES||54.44||7.779||18-Nov-2005||463.723||14.290||Not Rated||No|
|Corp||CONTINENTAL AIRLS INC||100.38||8.000||15-Dec-2005||6.367||7.970||CCC||No|
|Corp||GENERAL MTRS ACCEP CPSMARTNBE||100.81||6.400||15-Jan-2006||3.961||6.348||BB||No|
|Treas||T-NOTE 5.625 15-Feb-2006||100.83||5.625||15-Feb-2006||3.626||5.578||AAA||No|
|Corp||GENERAL MTRS ACCEP CPSMARTNBE||100.42||4.850||15-Jan-2006||3.577||4.830||BB||No|
What does this all mean? There are several columns in the table above, we'll look at them one at a time.
Type: tells you is this bond was issued by the U.S.Treasury or by a corporation.
Issue: tells you the name of the bond issue. People who issue bonds typically do it a lot, so you can't just say "GM bonds," you have to say which GM bonds.
Price: is how much you have to pay to buy one of these little gems. For a $1000 bond, you multiply by 10. So the GM $1000 bond costs $1008.10 to buy right now - you pay them $1008.10, you get monthly payments of $5.33 (see Coupon below), and you get $1000 back on Jan 15 2006.
Coupon: tells you if the bond is making regular interest payments, and what the interest rate is. The interest is calculated based on the face value of the bond, typically $1000, not on the selling price of the bond. So this number tells us how much in coupon payments we will receive each year. It does not tell us how much interest we're earning on our money. 6.4 means GM will send us $64 each year on a $1000 bond. The coupon payments may be made monthly, quarterly, semi-annually, or yearly. We have to click on the bond name to get better information. The 6.4% GM bond pays monthly, meaning you get $64 / 12 = $5.33 each month.
Maturity: is the date when you get your check for $1000.
YTM(%): is the yield to maturity. This means if you buy the bond at the listed price, and hold it until the maturity date, then this investment is the same as putting your money in a bank account at YTM interest rate. Note that the 6.4% GM bonds are actually paying you 3.961% interest, not 6.4%.
Current Yield: is the coupon interest rate recalculated for the purchase price.
Rating: This is the Standard and Poors rating for the corporation. Bonds rated AAA to BBB are called "Investment Grade." Bonds rated BB to C are called "junk bonds." Bonds rated D and worse are in default, meaning the bonds are not being paid off.
Callable: This tells you if the corporation can decide to pay you off early and make no more coupon payments. If the bond is callable it's worth a lot less.
Above, we see that we can buy a $1000 bond from Delta Airlines for $544.40, due in 2 months. We can buy a $1000 bond from Delta Airlines for $244.40, due in three months. This looks like a great investment, right? Well, not exactly. At the time of this writing (9/05) Delta is in serious trouble, and is expected to file for bankruptcy before Oct. 15. On Oct. 15 the new bankruptcy laws go into effect, and Delta most likely will prefer the old laws. If Delta files for bankruptcy, these bonds will not be paid off on time, and perhaps never be paid off, or will perhaps be paid off many months late for far less than $1000. This will all be determined by a judge and a bunch of lawyers. However, if the Dec. 15 bond pays off on time, you will earn 400% on your money in three months, which corresponds to 1164% per year. High risk, high payoff. Continental is also struggling, but almost no one thinks they will declare bankruptcy in the next six months, so their interest rate premium is not very big.
In the paper we'll see two prices, Bid and Ask. If you have a bond to sell, you will get the Bid price. If you want to buy a bond, you'll pay the Ask price. The difference between the two is the built-in profit for the bond dealer.
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Revised Saturday, 10-Sep-2005 21:25:33 PDT