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Unformatted text preview: the coupon
rate of the bond. This Treasury bond pays
7¾ percent of the face value of the bond in
annual interest payments.
In the second column we learn when the
bond matures. This Treasury bond matures
in February 2009.
In the third column we learn how much
the buyer is willing to pay for the bond (the
price you will receive if you sell it). The
number here is 105:12. The number before
the colon is multiplied by 10, and the number after the colon stands for 32nds of $10.
Therefore, first multiply 105 $10, which gives you $1,050. Then, since 12/32 is 0.375,
multiply 0.375 times $10, giving you $3.75.
Add the $3.75 to $1,050 to get $1,053.75.
The fourth column indicates how much
the seller is asking for the bond. In other
words, it is the price you will pay to the seller
if you buy the bond. In this case, it is
In the fifth column the change in the
price of the bond from the previous trading
day is quoted in 32nds. It follows then that a
–1 means that the price of the bond fell by
1/32nd of $10 or approximately 32 cents
from the previous day.
Finally, yield, which is based on the ask
price, is the return a person who buys the
bond today (at the ask price) and holds it to
maturity will realize. For this bond, the yield
is 5.50 percent. Risk and Return
We discussed stocks in the first section of
this chapter and bonds in the second. The
common denominator between both these
sections is that people buy stocks or bonds
for the return. Simply stated, they buy stocks
and bonds in the hope that they will “make
We need to keep in mind that stocks and
bonds often come with different risk and
return factors. For example, it might be much
riskier to buy stock in a new company than it
is to buy a Treasury bond issued by the U.S.
Treasury. You can be fairly sure that the U.S.
Treasury is going to pay off that bond; after all,
the U.S. government has the ability to tax people. However, you can’t be so sure you’ll have a
positive return on the stock you buy in the
new company. You might buy the stock for
$10 one day, and...
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This document was uploaded on 01/16/2014.
- Winter '14