Bond Math 101
GFOAT Fall Conference 2015
Presented by
Tony Sekaly & Zach Brewer
Bond Math 101
I. Bond Basics
a) Coupon Types
b) Discount/Par/Premium
c) Types of Bonds
d) Yield (YTM, YTC, YTW)
e) Cash flow
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Bond Basics: What is a Bond?
A debt certificate issued by a governmental
entity or public company who promises to
repay the initial investment plus interest over a
specified time period.
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Note: Interest
• Interest rate (coupon), stated as a percentage
of the bond’s value at par
• Par value is typically $1000 per bond
• Interest payments on a semi-annual basis
• Last interest payment is made when the bond
matures and principal is returned
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Example
• You own one bond and have been receiving
regular semiannual payments of $25.
At maturity, you would receive the last
$25 interest payment plus the initial
investment of $1000. Therefore, you
would receive a total of $1,025.
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Bond Features
• Coupon type
• Fixed, Floating, Zero
• Market Price
• Discount, Par, Premium
• Payment Frequency
• Maturity
• Call Features
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Coupon Types
• Fixed Rate
• Specified coupon, fixed to maturity
• Step-Up
• Coupon rises at predetermined intervals
• Floating Rate
• Margin over or under a specified index value
• Zero Coupon
• No coupon payments, bond issued at a discount
and par value is redeemed at maturity
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Example
• Fixed Rate
• 5% Coupon for 10 years
• Floating Rate
• Prime +1.75%, adjusting monthly
• Zero Coupon
• $800 purchase price $1000 value at
maturity– investment return is the
difference of purchase price and par value
($200)
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Types of Bonds
• Treasury's
• Bills, Notes, Bonds
• Agency Bonds
• FNMA, FHLB, FAMCA, FFCB, FHLMC
• Municipal Bonds
• Corporate Bonds
• Mortgage Backed Securities
• CMOs
• SBA Securities
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Yield Calculations
• Nominal Yield
• Coupon yield set at issuance
• Current Yield
• Coupon payment relative to market price
• Yield to Maturity
• Annualized return if held to maturity
• Yield to Call
• Yield to the first call opportunity
• Yield to Worst
• Lowest potential yield in a callable bond
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Example Bond Offerings: Bloomberg
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Treasury
Discount Note
CD
Bullet Agency
Callable Agency
Step-Up Agency
Municipal
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Treasury: DES
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Treasury: YAS
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Treasury: Cash Flow
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Agency Discount Note: Fhlmc Rates
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Agency Discount Note: Des
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Agency Discount Note: Yield / Trade Ticket
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Agency Discount Note: Cash Flow
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Ally Bank CD: DES
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Ally Bank CD: YAS
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Ally Bank CD: Cash Flow
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1.5 year Bullet Agency: DES
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Bullet Agency: YAS
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Bullet Agency: Cash Flow
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Callable Agency: DES
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Callable Agency: YTC
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Callable Agency: Cash Flow
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Step-Up Agency: DES
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Step-Up Agency: Coupon Detail
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Step-Up Agency: YTC
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Step-Up Agency: Cash Flow
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Municipal Deal
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Muni Bond - .35% to 2/1/16
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Trade ticket Example
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Disclaimer
Nothing contained herein is an offer to sell or the solicitation of an offer to buy any financial
instrument. The opinions and recommendations presented do not take into account
individual client circumstances, objectives, or needs and are not intended as
recommendations of particular securities, financial instruments or strategies to particular
clients. Investors must make their own independent decisions regarding any securities or
financial instruments mentioned herein and seek professional advice, including tax and
accounting advice. Any indications of market valuation contained herein are based on
current information that we consider reliable, but we do not guarantee it is accurate or
complete and users should make whatever additional determinations of market value they
deem appropriate. All assumptions, opinions and estimates constitute Coastal Securities,
Inc.’s (CSI) judgment as of this date and, along with prices and yields, are subject to change
without notice. Past performance is not indicative of future results. The yield and/or average
life shown on loans, SBA pools, CMOs or mortgage backed securities consider prepayment
assumptions that may or may not be met. Changes in prepayments may significantly affect
yield and/or average life. CSI does not accept orders or instructions transmitted via email or
left on any phone voice or text mail system. Please be aware that communications received
by or sent from our email system are not confidential and subject to review by supervisory
personnel.
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