Chapter 3 Valuing Bonds 49
bre44380_ch03_046-075.indd 49 09/30/15 12:47 PM
Maturity Coupon Asked Price (%) Yield to Maturity (%)
November 2017 4.25 109.69 0 .965
November 2018 9.00 130.07 1.267
November 2019 1.00 96.96 1.636
November 2020 2.625 104.34 1.857
November 2021 8.00 139.46 1.943
November 2022 7.625 141.03 2.040
November 2023 2.75 104.21 2.231
November 2024 2.25 99.40 2.318
November 2028 5.25 131.25 2.577❱ TABLE 3.1 Treasury bond quotes, November 2014.
You can’t buy Treasury bonds, notes, or bills on the stock exchange. They are traded by
a network of bond dealers, who quote prices at which they are prepared to buy and sell. For
example, suppose that in 2014 you decide to buy the 4.25s of 2017. You phone a broker, who
checks the current price on her screen. If you are happy to go ahead with the purchase, your
broker contacts a bond dealer and the trade is done.
The prices at which you can buy or sell Treasury notes and bonds are shown each day in
the financial press and on the web. Table 3.1 shows the prices of a small sample of Treasury
notes and bonds in November 2014. Look at the entry for our 4.25s of 2017. The asked price
109.69 is the price you need to pay to buy the bond from a dealer. This means that the 4.25%
bond costs 109.69% of face value. The face value of the bond is $1,000, so each bond costs
$1,096.90.^4
The final column in the table shows the yield to maturity. Because interest is semiannual,
annual yields on U.S. bonds are usually quoted as twice the semiannual yields. Thus, if you
buy the 4.25% bond at the asked price and hold it to maturity, every six months you earn a
return of .965/2 = .4825%.
You can now repeat the present value calculations that we did for the French government
bond. You just need to recognize that bonds in the U.S. have a face value of $1,000, that their
coupons are paid semiannually, and that the quoted yield is a semiannually compounded rate.
Here are the cash payments for the 4.25s of 2017:
(^4) The quoted bond price is known as the flat (or clean) price. The price that the bond buyer actually pays (sometimes called the full
or dirty price) is equal to the flat price plus the interest that the seller has already earned on the bond since the last interest payment.
The precise method for calculating this accrued interest varies from one type of bond to another. Always use the flat price to calculate
the yield.
Cash Payments
May 2015 Nov. 2015 May 2016 Nov. 2016 May 2017 Nov. 2017
$21.25 $21.25 $21.25 $21.25 $21.25 $1,021.25
Source: The Wall Street Journal website, http://www.wsj.com.