Note that on the day of this quote ibm had four bonds

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Unformatted text preview: ear 2025. This information allows investors to differentiate between the various bonds issued by the corporation. Note that on the day of this quote, IBM had four bonds listed. The next column, labeled “Cur Yld.,” gives the bond’s current yield, which is found by dividing its annual coupon (7%, or 7.000%) by its closing price (100.25), which in this case turns out to be 7.0 percent (7.000 100.25 0.0698 7.0%). The “Vol” column indicates the actual number of bonds that traded on the given day; 10 IBM bonds traded on Monday, April 22, 2002. The final two columns include price information—the closing price and the net change in closing price from the prior trading day. Although most corporate bonds are issued with a par, or face, value of $1,000, all bonds are quoted as a percentage of par. A $1,000-par-value bond quoted at 110.38 is priced at $1,103.80 (110.38% $1,000). Corporate bonds are quoted in dollars and cents. Thus IBM’s closing price of 100.25 for the day was $1,002.50—that is, 100.25% $1,000. Because 278 PART 2 Important Financial Concepts a “Net Chg.” of 1.75 is given in the final column, the bond must have closed at 102 or $1,020 (102.00% $1,000) on the prior day. Its price decreased by 1.75, or $17.50 (1.75% $1,000), on Tuesday, April 22, 2002. Additional information may be included in a bond quotation, but these are the basic elements. Bond Ratings Independent agencies such as Moody’s and Standard & Poor’s assess the riskiness of publicly traded bond issues. These agencies derive the ratings by using financial ratio and cash flow analyses to assess the likely payment of bond interest and principal. Table 6.2 summarizes these ratings. Normally an inverse relationship exists between the quality of a bond and the rate of return that it must provide bondholders: High-quality (high-rated) bonds provide lower returns than lowerquality (low-rated) bonds. This reflects the lender’s risk-return trade-off. When considering bond financing, the financial manager must be concerned with the expe...
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This document was uploaded on 01/19/2014.

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