IBM Bond Pricing.
All bonds have some common characteristics, but they do not always have the same contractual features. Differences in contractual provisions, and in the underlying strength of the companies backing the bonds, lead to major differences in bonds risks, prices, and expected returns. It is important to understand how bond markets actually function and what the appropriate terminology is.
Go to www.nyse.com Click on Products, and then click on Bonds on the right side of the window. In the window "Issuer name" type IBM. Click Go.
In your initial response to the topic you have to answer all 5 questions.
You are expected to make your own contribution in the main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor.
Copy the quotation of one IBM bond that contains the price "Last Trade Price". Present these quotations in your posting.
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Ibm Corp. 7.625% Nts 10/15/18 (NYSE ARCA:IBM18)
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Last Price
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-- --|USD| Delayed
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Day Change
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Bid 113.860
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Ask
114.360
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Bid Size
100
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Ask Size
100
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High
-
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Low
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Volume
-
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Open
-
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Bid Yield
1.519
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Ask Yield
1.313
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Prev Close -
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Prev CL DT
-
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Coupon Rate 7.625
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Maturity Date
10-15-2018
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Issue Type
Corporate Bonds
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CUSIP
459200GM7
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Describe the information that you received from the quote of the bond. You have to explain each number and symbol that appears in the bond quotation.
Ibm Corp. 7.625% Nts 10/15/18 (NYSE ARCA:IBM18) - Provides company that issued the bond (IBM Corp), Coupon rate (7.625%), Maturity date (10-15-2018) and NYSE identifier (IBM18)
Bid - Price buyers are willing to pay for the bond
Bid Size - The amount of bonds available for sale at the Bid price
Ask - Price sellers are willing to sell the bond
Ask Size - The amount of bonds the seller is willing to sell at the Bid price
Bid Yield - The amount of return the buyer should expect
Ask Yield - The amount of return the seller should expect
Coupon Rate - The annual interest rate paid on a bond
Maturity Date - The date when the principal of the loan (bond) is due to the investor
Issue Type - The type of bond issued
CUSIP - Committee on Uniform Security Identification Procedures - Alphanumeric code that identifies the bond for settlement of trade
Assume that par value of the bond is $1,000. What was the last price of the bond in $$$ (listed in Last Trade Price)?
$121.15
Assume that par value of the bond is $1,000. Calculate annual coupon interest payments.
$1000 x 7.625% = $76.25
Assume that par value of the bond is $1,000. Calculate current yield of the bond.
76.25/121.15 = 62.94%
Assume that par value of the bond is $1,000. Assume annual coupon payments. Calculate YTM of the bond using the last price (listed in Last Trade Price). (Round the number of years to the whole number). Show your work.
YTM = (Coupon payment + (Face value - Price)/n)/((Face value + Price)/n)
= (76.25 + 1000 - 121.15)/2)/((1000 + 121.15)/2)
= .91990 or 91.99%
Describe one major shortcoming for YTM and current yield.
Using YTM has some of the same disadvantages as using the rate of return. It only calculates the coupon payments at YTM interest rates, which typically change over time. The current yield only utilizes the current price of the bond and is inaccurate because the prices are constantly changing because of market fluctuations.
How would the following affect the yield on newly issued bond? Please explain your answer.
The bonds are callable.
Bonds are able to be redeemed by the issuer before maturity, which means the investor would lose the interest payments after the point of redemption
The bonds are subordinated to the existing bond issue.
Subordinated bonds are those that do not have a high claim on the company's assets or earnings when the bond is defaulted on. If the company defaults on the bond, unsubordinated loans would be paid prior to the subordinated loans, making subordinated loans a more risky investment.
The bond rating is better or worse than the Moody's Aa3 that IBM anticipates.
According to nasdaq.com, a Moody's Aa3 rating is the fourth highest rating given for long-term corporate investments. A bond with this rating would be considered a high-quality investment with very low risk. Receiving a rating above the Aa3 rating (Aa2) would say that the bond has a lower risk, but also lower return. A rating lower than Aa3 (A1) would increase the risk, but also increase the return.
How did you arrive at the Last Price Paid for this bond at $1,211.50 ? ... that information isn't provided in the quote. Although your subsequent calculations based on the number are correct, did you go outside to find that price? Because, according to the quote the ASK price was much higher, and the quote shows a "delayed-price".