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. Click on Bond Directory by name, and then click on letter I in the line “Browse by name”.
1. Copy the quotation of one IBM bond that contains the price “Previous Close” in the last column. Present these quotations in your posting.
2. 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.
3. What was the last price of the bond in $$$ (listed in Previous Close)?
4. Calculate annual coupon interest payments.
5. Calculate current yield of the bond.
6. Calculate YTM of the bond using the last price (listed in Previous Close). (Round the number of years to the whole number). Show your work.
7. Describe one major shortcoming for YTM and current yield.
8. How would the following affect the yield on newly issued bond? Please explain your answer.
a) The bonds are callable.
b) The bonds are subordinated to the existing bond issue.
c) The bond rating is better or worse than the Moody’s Aa3 that IBM anticipates.
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