Economics_Ch16

# The number before the colon is multiplied by 10 and

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

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 \$1,054.37. 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 money.” 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...
View Full Document

## This document was uploaded on 01/16/2014.

Ask a homework question - tutors are online