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The Illinois State Collegiate Compendium Academic Lectures in Business and Economics.

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This is Business Finance, FIL 190, Spring Semester 2024.

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Welcome back for the second round of this two round lively show called FIL 190.

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I'm glad to see you all look well rested or maybe not well rested.

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You look like you're in good shape for this next round.

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If you have questions on the midterm, stop by my office or send me an email message.

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The overall average was very good, which means I'll probably have to make the final very hard

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so that I can get my quota of failed students.

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Nope. Go ahead.

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We go through, this side of the course is more mathematical and also deeper conceptually than the first half.

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Although the mathematical part, I guarantee you, you'll have a spreadsheet for about anything

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that you would want to do in this part of the course.

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So nothing to panic about.

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We will be going through a spreadsheet today for bonds.

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But before we do that, we always look at the numbers and see just how grim the markets are right now.

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We actually have a really serious bold egg coming on right now.

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Look at those jumps and it's still, the momentum is still upward as you can see those spark charts

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are all pointing that way up toward the sky.

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So it's just a good day.

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We had sour days last week. It was just a grouchy market.

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It wasn't anything terrible, but it just didn't seem to want to find much to be chipper about.

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And now all of a sudden, apparently the bluebird of happiness showed up this morning

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beating on the door to get in out of the cold.

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And so we have this happening.

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Typically, as is typical, the Dow is up the least, a little more than a third of a percent.

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The somewhat riskier portfolio, the S&P 500 is up more than 1%, a little more than a percent.

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And the NASDAQ, the riskiest portfolio, is having the best, strongest reaction

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to whatever the good news is that's coming through the market.

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And we do have the NASDAQ up more than a percent and a half already today.

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So, I don't know, something like this, it should slow down as the day proceeds.

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But if it went like this the rest of the day, boy, this would just be a dandy day.

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Especially for me, sitting out there with call options hanging in the balance.

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I think it's lost money last week, but you can see this is good news.

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Crude has found the other side of that 72 to 79, and it is staying there.

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It is highly volatile, but it seems to now be interested in staying above $80 a barrel.

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And there are reasons for that.

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One of them is that there is noticeably more demand for hydrocarbon products.

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And also, there's a little bit of a spook.

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I've heard a couple mentions from traders that there's some kind of a buddy thing

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going on between Saudi Arabia and Russia to cut production to bring up oil prices.

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And that notwithstanding price cap on Russian oil,

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it seems to have gotten the market a little more interested in finding a somewhat higher

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price cap down for the price of oil.

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But as you can see from that spark chart, a lot of volatility in it right now.

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And that means uncertainty, of course.

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And that's one of the things here in finance we talk a lot about.

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Uncertainty, which means risk.

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And risk is something that drives prices of some things up and prices of other things down,

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depending upon what kind of a market you're talking about.

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And there you go.

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Now, running over here and having a quick look at other happy things,

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gold has really, really gotten up there above 2000 neckline.

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We're in a course right now in a time when necklines are holding

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and then they are giving way to higher prices.

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Gold is up above 2150 an ounce, and that's some pretty dramatic territory.

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It climbed out of a hole that started last night,

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but I don't know what to say about that other than that the gold bugs are pretty happy right now.

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Now, the 10-year bond, and this is where we get into the lecture today,

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we have the yield that has shown itself.

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Right now it is at 4.31, and that's up one basis point.

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As you can see, there was a spike this morning.

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That means yields went up, so that means that prices went down,

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which means that there was a sell-off in bonds early on.

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But now that has petered out.

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As you can see, the spark chart is plowing back down.

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But that was good news, we don't need the noise of yields being that high.

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Part of that is because of the Fed.

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The Federal Reserve, it's sending a mixed signal.

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No, we're not going to do any rate drops right now because there's still signs of inflation,

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and it's a little troubling that it's still resisting.

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However, the Fed chairman also gave hints that later in the year there will be rate cuts.

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So it's one of those things where the markets are saying,

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okay, what's going on, which is it right now?

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Should we move yields on the expectation of future rate cuts,

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or should we hold rates, the yields high, based upon the fact that the yields aren't going to go down for a while?

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And that causes some uncertainty, some turbulence in the market.

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I don't know, the Fed right now, they're fairly good.

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I mean, they know what they're doing, and it almost makes you wonder if they want to keep the markets

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guessing a little bit about where things are right at the current time.

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Okay, moving along here, that's enough of that fun time.

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So over here, Nikkei just had this rise that was right away,

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and then as you can see, through the day in Tokyo, which was last night for us,

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it just floated for a while, but it still seemed to have a little bit of upward trend after that first big pop,

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finished off 2 and 2 thirds percent up.

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That is a really strong day.

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It kind of gives us, makes us wonder, is that what's going to happen here today?

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Is it going to have a steadily increasing bear day, a bull day today?

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And the Financial Times, of course, it's the British, so it was all over the place.

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Look at that kangaroo going on.

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They're still open for business right now.

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They're still trading over there in their afternoon.

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But as you can see, volatility, and then there was a spike, and then a sell-off,

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and there was a bull spike, and then profit-taking, and then it just dropped.

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The floor just dropped out, and so right now it's sitting almost right where it started.

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The sun came up over in London.

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But all of that, having been said, here we are, sitting here in this happy time.

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We've got a nice bull market going on today,

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and so that means everyone throw all your money into the market

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so you can lose it tomorrow when the bears come back, or something like that.

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Let me switch gears here a little bit.

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This is about bonds.

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I gave you a basic outline of bonds yesterday.

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Or rather, it seems like it was yesterday, but it was more than a week ago

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we talked about bonds, and this gets into more of the technical side of bonds.

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Finances, prices, yields, and all of that.

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Bonds are not exciting for the most part, unless a company declares bankruptcy,

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and then the bond market gets a little bit bouncy about that.

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However, they are a huge part of investments in many situations.

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Corporate investments are oftentimes in bonds.

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Institutional investors of various kinds, trust funds, invest in bonds,

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pension funds, investment bonds, it's just there is a vast market for them.

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It doesn't sound like an exciting life.

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I know traders who've been offered positions paying well on the bond desk,

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and they just don't want to do it.

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They said that's not the exciting thing.

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It's sort of like Air Force and Navy pilots.

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They don't want to fly any plane that has an A on it.

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They want an F because A means attack, F means the big fighter pilot.

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Same thing in our market, in our world too.

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A lot of people say, no, the bond market, that's dull.

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It pays awfully well though, and it's not a high pressure kind of life,

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but it is one where you are held to the standard.

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You're investing in bonds because that's what you're supposed to do.

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The reason you're investing in bonds is because generally speaking, they're safe.

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If a bond becomes unsafe, then you need to be able to get rid of that.

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First, be aware that the bond is getting dodgy and get out from under it

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before you lose a lot of the company's investment.

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It puts the portfolio at great risk.

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Now, in bond markets, the risk is oftentimes, start determining risk by its rating.

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Ratings are done by S&P, Standard & Poor's.

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They're done by Moody's, and some are done by Fitch.

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They have their own lettering system.

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There's some talk about it in the book.

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Most of the time, for general purposes, we look at the S&P rating,

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the A, A, A, and the B's and all of that.

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That's where we usually kind of center ourselves, is on the S&P ratings,

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although the other ones are worth it, too.

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I have a story that I could tell you about Moody's ratings.

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Sometimes I'm reticent to tell you the story that these ratings,

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sometimes they are motivated by other than a completely honest look at the bond

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and the company backing the bond, behind the bond.

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In fact, it's pretty well known that S&P has a negative bias against government debt securities.

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They just downgraded one government bond just a few weeks ago, I believe.

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And of course, that's just absolutely ludicrous.

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It's as if they're saying there is a risk of default of this debt instrument,

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and there is not.

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It's just not going to happen.

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And all they're doing is carrying out a long-term feud that they've had with the U.S. government

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because the U.S. government kicked their asses for improperly rating very bad bonds

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more than almost a decade and a half ago.

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And Moody and Standard & Poor's has been a bitch ever since to the government

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because the government spanked them for it.

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On the other side, in my own personal experience,

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and I won't tell you what the rating agency is,

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but I would get small companies when they wanted to issue debt securities.

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They wanted to borrow by issuing bonds.

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I found out that in the case of these small companies,

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the more I paid, or the more I got my client to pay,

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the more favorable the rating was going to be to a certain extent.

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And that, I had no idea.

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I came out of the PhD program, everything is according to theory and all that,

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and all the players are good guys and, well, bollocks on that.

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It turned out that if I could have gotten that client to cough up that kind of money,

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which it didn't have, they would have gotten a better bond rating,

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which means that they would have been able to negotiate a lower coupon rate

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for the bonds that they issued.

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As it was, they ended up getting a coup up.

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They were basically rated as junk.

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They paid a very high price for the bonds.

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And that was that. That was the end.

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Okay, now, behind the ratings, the coupon is a metric of how risky the bond was

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at the time it was issued.

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It's not a measure of the company's risk right now.

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It's a measure of the risk that was assessed at the time of the investment bankers' negotiations with the company.

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You, sir, come to my, I'm an investment banker,

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you come to me and you say, I should like to borrow $100 million.

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And I say, okay, we're going to get into a negotiation.

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Because my backers, the ones who are going to put the money on the table,

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put the blood into the game, want a fair shake.

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We have to decide how risky you are, all the other terms of it,

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and then we talk about the coupon from those risk factors that are affecting the bond.

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It's the company's style. What do its financials look like?

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What's its rating? How long is the bond?

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Obviously, the longer a bond is, the higher the maturity premium is going to be.

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So you've got the default risk coming in there, the default premium, the maturity premium.

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And how likely is it that my investors are going to be able to get rid of this bond if they want to in a relatively short timeframe?

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There's the illiquidity premium.

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And what are the macro interest rates right now?

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What's the risk-free rate running right now?

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All of those are going to go into the negotiation and we'll come up with a coupon.

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And that could even change, it's a preliminary, it can be set,

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it's set really close to time of issuance and all that finally, but we get to put all that in there.

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There are other provisions. Okay, is this a callable bond?

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Is this a convertible bond? Putable bond?

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All of those will go into the decision on the coupon.

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Now, in this class, this is an intro class, and I gloss things a lot.

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You don't have to worry about this, okay? Trust me on that.

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However, I do caution you that if you step into this world, you'll do these things and you'll learn how it's done.

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You as a relative newbie, as I was back in the day, you're going to just shut up and listen.

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They're going to give you busy work to do, grunt work, calculations, type this up,

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whoop this up on our spreadsheets and all this. But as time goes along,

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you'll begin to know all of the ways that this happens, the negotiation, the parameters and all of that.

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We have a course here, and I'm going to promote two courses here, okay?

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One is, this one is in bonds, this is stocks, mutual funds.

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It's our investments course, our EIF, our Educational Investment Fund.

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You work in a team, and you're overseen by a trustee group of actual principles of brokerage houses in the state.

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And you manage a real portfolio of here at Illinois State University.

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And let me tell you, we really get excited about you not losing a lot of money.

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There's even a better part of it too for the Department of Finance, Insurance and Law.

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We get a commission from your success in the Educational Investment Fund.

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It's not the easiest course. It used to be harder than it is now.

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We backed off somewhat, but it's still, it is a hell of a course to take

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if you want to get into the world of trading stocks, mutual funds, things like that.

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And you get a lot of connections. Hell, you're working with these little demigods of brokerage community of Illinois

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who are watching over your shoulder at any given time.

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You learn how to collaborate, work in a group, and you find out the consequences of your decisions

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in actual real money in that Educational Investment Fund.

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We've been doing good for a few years here, really good.

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And there's where you would come in.

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Like I said, that's a course that you can take after you do 242 and 341.

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It's a hell of a course.

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Now we have another one, our fixed income fund, fixed income bonds.

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And so there's one, if you want to get into the world of bonds,

224
00:18:51,960 --> 00:18:53,960
and it doesn't hurt to take both of them.

225
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That way you have the flexibility of moving from one desk to another.

226
00:18:57,960 --> 00:19:06,960
You can start the fixed income desk at a brokerage house or something like that,

227
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and then switch over to the equity, or you could do it the opposite way.

228
00:19:11,960 --> 00:19:18,960
So those two courses are Educational Investment Fund course, EIF, and our fixed income course.

229
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They get you into this world deeper.

230
00:19:20,960 --> 00:19:25,960
Now, and the reason I'm bringing this up now is because we're doing fixed income.

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Bonds are a fixed income instrument for the most part.

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There are some that are a little bit not quite fixed, as in it's always the same.

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But for the most part, bonds are going to deliver a cash flow, and no cash flow.

234
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The coupon value, the coupon rate times the number of shares outstanding on a regular basis.

235
00:19:54,960 --> 00:19:59,960
Now, your book starts out by saying it's once a year a coupon comes out.

236
00:19:59,960 --> 00:20:01,960
In reality, it's two times a year.

237
00:20:01,960 --> 00:20:07,960
And it's so easy on an Excel spreadsheet, you just change a one to a two or a two to a one.

238
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But do know that.

239
00:20:09,960 --> 00:20:14,960
And the difference between them is oftentimes pretty trivial.

240
00:20:14,960 --> 00:20:20,960
But that's the next thing, is since a coupon is going to be twice a year,

241
00:20:20,960 --> 00:20:24,960
and I'll switch between once and twice just to give you a feel for it.

242
00:20:24,960 --> 00:20:31,960
Now, here's the thing that's odd, that has changed over my time as a professor.

243
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Quotes on bonds used to be as easy to find as quotes on stock.

244
00:20:37,960 --> 00:20:43,960
You just went to some place like Yahoo or something like that, and you get a bunch of bond quotes.

245
00:20:43,960 --> 00:20:49,960
You can see the top gainers, the top losers on the bonds, just like the stocks.

246
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You can't do that anymore.

247
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It's like it's a dead field.

248
00:20:54,960 --> 00:21:00,960
In order for me to find a quote, I would have to name a bond.

249
00:21:00,960 --> 00:21:05,960
And bonds don't have those nice trading symbols like stocks do.

250
00:21:05,960 --> 00:21:11,960
Every bond has this behemoth string of letters and numbers.

251
00:21:11,960 --> 00:21:14,960
And so it's really not like it used to be.

252
00:21:14,960 --> 00:21:17,960
There were a few places even a couple of years ago,

253
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like the Wall Street Journal used to still show the gainers and the losers in bonds.

254
00:21:23,960 --> 00:21:26,960
And they gave me some place I could show some bonds.

255
00:21:26,960 --> 00:21:28,960
You can't do that anymore.

256
00:21:28,960 --> 00:21:29,960
They're just not out there.

257
00:21:29,960 --> 00:21:31,960
Why aren't they out there?

258
00:21:31,960 --> 00:21:34,960
Mostly because they are not interesting.

259
00:21:34,960 --> 00:21:38,960
Individual investors don't jump into bonds.

260
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If they love bonds, they're just going to get a mutual fund or an ETF or an ETN of some kind

261
00:21:44,960 --> 00:21:51,960
that will have bonds as its portfolio or will have a lot of bonds in the portfolio.

262
00:21:51,960 --> 00:21:58,960
So individual investors, the institutional investors are the ones who are interested in bonds.

263
00:21:58,960 --> 00:22:04,960
And so why open websites just aren't going to waste time

264
00:22:04,960 --> 00:22:12,960
because the institutional investors are going to be using the fancy stuff to get their bond quotes.

265
00:22:12,960 --> 00:22:20,960
However, I can get, if I know a company and I'm interested in a bond,

266
00:22:20,960 --> 00:22:25,960
I can do that through, I think it's called C-bonds.

267
00:22:25,960 --> 00:22:29,960
It's the place, and I'll show you where it is here in just a minute.

268
00:22:29,960 --> 00:22:35,960
But the two things that we can calculate.

269
00:22:35,960 --> 00:22:44,960
Well, let me stop the action here for just a minute and put some information on the board.

270
00:22:44,960 --> 00:22:53,960
The face value, you'll hear me call it face, future value,

271
00:22:53,960 --> 00:22:59,960
is always going to be $1,000 for our purposes.

272
00:22:59,960 --> 00:23:04,960
Now, remember that bonds oftentimes quote on the hundred.

273
00:23:04,960 --> 00:23:12,960
Excel is weird because in order to find a price, you use the thousand.

274
00:23:12,960 --> 00:23:16,960
But in order to find the yield, you have to quote on the hundred.

275
00:23:16,960 --> 00:23:18,960
It drives me crazy sometimes.

276
00:23:18,960 --> 00:23:22,960
So you'll hear me go back and forth between these.

277
00:23:22,960 --> 00:23:28,960
Now, these, the thousand and the hundred, those are called par.

278
00:23:28,960 --> 00:23:32,960
Par on the hundred or this par value.

279
00:23:32,960 --> 00:23:34,960
And we use the term par.

280
00:23:34,960 --> 00:23:36,960
We don't say par value.

281
00:23:36,960 --> 00:23:40,960
We just say par.

282
00:23:40,960 --> 00:23:48,960
Now, the next one, I don't know.

283
00:23:48,960 --> 00:23:53,960
Yes, it's used, but Excel gets all excited about it.

284
00:23:53,960 --> 00:23:58,960
So I'll tell you the settlement.

285
00:23:58,960 --> 00:24:00,960
Or settlement.

286
00:24:00,960 --> 00:24:08,960
Settlement is the actual day that you obtain ownership of the security of the bond.

287
00:24:08,960 --> 00:24:09,960
That's settlement.

288
00:24:09,960 --> 00:24:22,960
So I set up Excel so that it automatically makes settlement the day that you open the Excel sheet to do a calculation.

289
00:24:22,960 --> 00:24:25,960
In other words, as of today.

290
00:24:25,960 --> 00:24:40,960
Now, in the real world, of course, you might have a settlement that was a week ago or you are calculating for a settlement that you forecast to be next Friday, something like that.

291
00:24:40,960 --> 00:24:42,960
So you might have to change the settlement date.

292
00:24:42,960 --> 00:24:48,960
But I mean, it's like normally we assume that we get it today.

293
00:24:48,960 --> 00:24:52,960
And that's why I set up the Excel sheet so that you can see it that way.

294
00:24:52,960 --> 00:24:54,960
The settlement date.

295
00:24:54,960 --> 00:25:00,960
Okay, now it gets into the other parts of it.

296
00:25:00,960 --> 00:25:03,960
Okay.

297
00:25:03,960 --> 00:25:06,960
The time of maturity.

298
00:25:06,960 --> 00:25:16,960
Or the date.

299
00:25:16,960 --> 00:25:19,960
You'll hear me use the term maturity.

300
00:25:19,960 --> 00:25:24,960
The date of maturity or the time of maturity.

301
00:25:24,960 --> 00:25:25,960
You'll just hear me say maturity.

302
00:25:25,960 --> 00:25:28,960
Maturity on, maturity 2032.

303
00:25:28,960 --> 00:25:30,960
That's all I'll say about it.

304
00:25:30,960 --> 00:25:32,960
I'll just use the term maturity.

305
00:25:32,960 --> 00:25:40,960
Getting our language down is kind of one of the hidden parts of getting you into finance as your career.

306
00:25:40,960 --> 00:25:44,960
Not just as your major, but as your career.

307
00:25:44,960 --> 00:25:46,960
Just getting a little bit of our lingo down.

308
00:25:46,960 --> 00:25:50,960
You don't want to go crazy and say things that sound silly.

309
00:25:50,960 --> 00:25:55,960
But just use calmly our shortened versions of things.

310
00:25:55,960 --> 00:25:57,960
That's the time of maturity.

311
00:25:57,960 --> 00:26:02,960
Now, another one is term.

312
00:26:02,960 --> 00:26:10,960
Term is how long the instrument has until maturity.

313
00:26:10,960 --> 00:26:16,960
So it's 2024 and I mentioned maturity at 2032.

314
00:26:16,960 --> 00:26:21,960
So the term is eight years.

315
00:26:21,960 --> 00:26:26,960
The term is eight years.

316
00:26:26,960 --> 00:26:38,960
Now, interestingly enough, the settlement date really doesn't mean a whole lot if you're a secondary market purchaser of bonds.

317
00:26:38,960 --> 00:26:43,960
If you have a bond in the secondary market, the settlement date doesn't mean anything to you.

318
00:26:43,960 --> 00:26:45,960
You didn't do anything on that date.

319
00:26:45,960 --> 00:26:49,960
Someone else did and now you're just buying a bond from someone else.

320
00:26:49,960 --> 00:26:55,960
The term does matter.

321
00:26:55,960 --> 00:27:05,960
And then I want to put a word in here.

322
00:27:05,960 --> 00:27:10,960
There's actually two words, but one of them really doesn't mean a whole lot.

323
00:27:10,960 --> 00:27:12,960
I'll put it in parentheses.

324
00:27:12,960 --> 00:27:17,960
Worst.

325
00:27:17,960 --> 00:27:20,960
Now, I don't think this one is even more.

326
00:27:20,960 --> 00:27:22,960
Worst.

327
00:27:22,960 --> 00:27:30,960
That is the worst case scenario for when the bond matures.

328
00:27:30,960 --> 00:27:41,960
You see, a bond in 2032 might have a call provision that starts in 2028 or 2026.

329
00:27:41,960 --> 00:27:56,960
So worst, I could use the term for my calculations, but I might also use the worst, 2026.

330
00:27:56,960 --> 00:28:05,960
So in that case, I would not have a, if it were 2028, there's a call that could be executed in 2028.

331
00:28:05,960 --> 00:28:10,960
Okay, the best is the term 12 years.

332
00:28:10,960 --> 00:28:12,960
Is that right?

333
00:28:12,960 --> 00:28:15,960
No, eight years. I'm sorry, eight years.

334
00:28:15,960 --> 00:28:21,960
But the worst would, you would not put the term in to the proper place in Excel.

335
00:28:21,960 --> 00:28:25,960
You would put in the, in that case, four.

336
00:28:25,960 --> 00:28:29,960
You wouldn't put the best, the term, eight.

337
00:28:29,960 --> 00:28:33,960
You would put in the worst.

338
00:28:33,960 --> 00:28:40,960
In a worst case scenario, the term is reduced, the number is reduced to four from eight.

339
00:28:40,960 --> 00:28:44,960
So you'll see that term worst sometimes.

340
00:28:44,960 --> 00:28:51,960
Now, there are other reasons besides a call provision, the bond could be executed early.

341
00:28:51,960 --> 00:28:59,960
But call is most likely, is a likely case.

342
00:28:59,960 --> 00:29:04,960
Now, the price and the yield.

343
00:29:04,960 --> 00:29:07,960
We trade on prices.

344
00:29:07,960 --> 00:29:15,960
Now the price should not deviate far from a thousand.

345
00:29:15,960 --> 00:29:23,960
Because at the end, if you hold the bond to maturity, you're going to get a thousand dollars.

346
00:29:23,960 --> 00:29:26,960
You're going to get the payoff of the bond.

347
00:29:26,960 --> 00:29:34,960
So anywhere along the line, the bond is not going to go very far from that in a normal situation.

348
00:29:34,960 --> 00:29:42,960
Only if interest rates did something really wild or the company started going in toward bankruptcy.

349
00:29:42,960 --> 00:29:47,960
In that case, then the price could whip around somewhere.

350
00:29:47,960 --> 00:29:52,960
But normally the price is going to be somewhere around a thousand.

351
00:29:52,960 --> 00:29:56,960
Now if it's above a thousand, we sell premium.

352
00:29:56,960 --> 00:30:03,960
If it's below a thousand, we say discount.

353
00:30:03,960 --> 00:30:07,960
Now I'm going to come back here and say something about price in a minute.

354
00:30:07,960 --> 00:30:13,960
Let me get the other term down. The yield.

355
00:30:13,960 --> 00:30:18,960
The price reflects the yield mathematically.

356
00:30:18,960 --> 00:30:26,960
The price affects the yield, one for one mathematically by a formula.

357
00:30:26,960 --> 00:30:28,960
Think about it this way.

358
00:30:28,960 --> 00:30:34,960
The yield is what the market wants the bonds coupon to be.

359
00:30:34,960 --> 00:30:37,960
But of course, the coupon can't be that.

360
00:30:37,960 --> 00:30:49,960
The yield represents the current interest rate that should be paid by the coupon even though the coupon can't pay it.

361
00:30:49,960 --> 00:31:01,960
So if I said that a bond, it's an 8% bond and the yield is 9%.

362
00:31:01,960 --> 00:31:10,960
The market's saying that that coupon sucks on the current day or whatever.

363
00:31:10,960 --> 00:31:16,960
Because a bond of that risk should be paying 9%.

364
00:31:16,960 --> 00:31:22,960
This bond is paying only 8%, so that's going to cause the price to drop.

365
00:31:22,960 --> 00:31:32,960
Investors are going to sell the bond, driving the price down until the yield goes up to 9%.

366
00:31:32,960 --> 00:31:36,960
And I'll keep saying this over and over again.

367
00:31:36,960 --> 00:31:38,960
It's not obvious to most people.

368
00:31:38,960 --> 00:31:45,960
If it's that obvious to you, then you probably don't get invited to parties very much.

369
00:31:45,960 --> 00:31:47,960
Okay, now take the other.

370
00:31:47,960 --> 00:31:50,960
The bond has a coupon of 8%.

371
00:31:50,960 --> 00:31:53,960
Let's say that interest rates have fallen.

372
00:31:53,960 --> 00:32:03,960
This bond should be paying only 7% based upon its risk in the current macroeconomic and company situation.

373
00:32:03,960 --> 00:32:08,960
So this bond is paying a lot more than it should based on its risk.

374
00:32:08,960 --> 00:32:13,960
And so investors are going to go cuckoo bananas for this bond.

375
00:32:13,960 --> 00:32:23,960
They're going to buy it, drive the price above $1,000, which will drive the yield down until the yield gets down to 7%.

376
00:32:23,960 --> 00:32:28,960
In other words, you'll be paying a lot more because this is a candy bond.

377
00:32:28,960 --> 00:32:30,960
Because it's paying more than it should.

378
00:32:30,960 --> 00:32:31,960
It's paying 8%.

379
00:32:31,960 --> 00:32:42,960
And right now, it should be paying only 7%.

380
00:32:42,960 --> 00:32:55,960
So in other words, when interest rates in the economy were way up there, real high, bonds were, the coupons on bonds were being set high.

381
00:32:55,960 --> 00:33:07,960
So now that interest rates are beginning to ease back macroeconomically, well, these bonds are actually paying their kind of candy.

382
00:33:07,960 --> 00:33:13,960
So you're seeing investors buy these bonds because they're paying coupons that are unusually high.

383
00:33:13,960 --> 00:33:17,960
Which means, of course, that they are buying them.

384
00:33:17,960 --> 00:33:26,960
That's driving the price up and the yield down on these bonds.

385
00:33:26,960 --> 00:33:29,960
Now let me go back here to price.

386
00:33:29,960 --> 00:33:33,960
There are actually two prices.

387
00:33:33,960 --> 00:33:38,960
The one that you would see quoted is the clean price.

388
00:33:38,960 --> 00:33:41,960
But there's also a dirty price.

389
00:33:41,960 --> 00:33:45,960
The dirty is what you'll pay, is what you'll actually pay.

390
00:33:45,960 --> 00:33:49,960
Look at it this way.

391
00:33:49,960 --> 00:33:53,960
Let's say we had a bond.

392
00:33:53,960 --> 00:34:06,960
And it paid 8%, which means that on the thousand, you were getting a check for $80 a year.

393
00:34:06,960 --> 00:34:08,960
$80 a year, okay?

394
00:34:08,960 --> 00:34:10,960
And let's just make it one period.

395
00:34:10,960 --> 00:34:14,960
Okay.

396
00:34:14,960 --> 00:34:20,960
Here was the last coupon.

397
00:34:20,960 --> 00:34:27,960
Now here's the next coupon one year later.

398
00:34:27,960 --> 00:34:30,960
You got $80.

399
00:34:30,960 --> 00:34:47,960
And now, let's say in three months, you sell that bond.

400
00:34:47,960 --> 00:34:54,960
So from here on, it belongs to someone else.

401
00:34:54,960 --> 00:35:00,960
That someone else gets the next coupon.

402
00:35:00,960 --> 00:35:05,960
But a fourth of that coupon doesn't belong to him.

403
00:35:05,960 --> 00:35:12,960
It belongs to you because you had that bond for three of the 12 months.

404
00:35:12,960 --> 00:35:25,960
So you, the dirty price, is going to include one fourth of $80.

405
00:35:25,960 --> 00:35:35,960
So when you buy the bond here, when someone else buys the bond there, they not only pay the price,

406
00:35:35,960 --> 00:35:46,960
they also have to pay $20 more to compensate you because you won't get the coupon of which you deserved a fourth.

407
00:35:46,960 --> 00:35:48,960
The new buyer will get it.

408
00:35:48,960 --> 00:35:54,960
So the clean price would be $1,015.

409
00:35:54,960 --> 00:36:01,960
The dirty price would be the $1,015 plus $20.

410
00:36:01,960 --> 00:36:03,960
That would be the dirty price.

411
00:36:03,960 --> 00:36:09,960
If the clean price is $1,015 for the bond, that's a quote on the bond.

412
00:36:09,960 --> 00:36:20,960
What you'll see on your account, if I bought the bond at three months into the coupon cycle,

413
00:36:20,960 --> 00:36:34,960
what I'd buy, I'd see $1,015 plus $20, so I would actually pay $1,035.

414
00:36:34,960 --> 00:36:41,960
And whoever sold me the bond would get the $1,015 plus the $20.

415
00:36:41,960 --> 00:36:44,960
So be careful on a clean price.

416
00:36:44,960 --> 00:36:49,960
You see quotes are always clean because no one knows when the bond is going to sell,

417
00:36:49,960 --> 00:36:50,960
what day.

418
00:36:50,960 --> 00:37:00,960
So as soon as the bond sells, then suddenly the dirty premium is going to be kicked into it at that point.

419
00:37:00,960 --> 00:37:08,960
So in other words, if someone had sold that bond at six months, then he'd get half of the next coupon,

420
00:37:08,960 --> 00:37:16,960
so that would be tacked on to the clean price that whoever bought the bond paid for it.

421
00:37:16,960 --> 00:37:21,960
So that is always something you want to keep in mind if you actually buy bonds,

422
00:37:21,960 --> 00:37:25,960
is the quote isn't going to be what you actually have taken out of your account.

423
00:37:25,960 --> 00:37:36,960
If you buy a bond, you will pay what the quote was, but you will also pay the dirty on it too,

424
00:37:36,960 --> 00:37:39,960
the dirty piece on it too.

425
00:37:39,960 --> 00:37:42,960
Now, and we'll go back to these.

426
00:37:42,960 --> 00:37:44,960
One last pointer.

427
00:37:44,960 --> 00:37:53,960
Bonds are just like stocks, there's a bid and an ask.

428
00:37:53,960 --> 00:37:58,960
And something else that isn't really there with stocks anymore.

429
00:37:58,960 --> 00:38:04,960
You remember I used that term round lot for you, on you, a round lot of the 100 shares?

430
00:38:04,960 --> 00:38:12,960
Well, that really doesn't mean anything with stocks much anymore, but it actually does with bonds.

431
00:38:12,960 --> 00:38:22,960
An odd lot might have a different quote from a round lot.

432
00:38:22,960 --> 00:38:31,960
It does happen. I think I had to think about one where I'd see that, and I ran into a couple where you saw that.

433
00:38:31,960 --> 00:38:39,960
So just to get this underway here, just to show you before we whip out the old Excel sheets and crank on this.

434
00:38:39,960 --> 00:38:46,960
Okay, here's meta.

435
00:38:46,960 --> 00:38:50,960
Oh, look at that.

436
00:38:50,960 --> 00:38:52,960
Full lot versus odd lot.

437
00:38:52,960 --> 00:38:59,960
They're using full lot, I always say round lot, but you know, there you go, old fashioned.

438
00:38:59,960 --> 00:39:05,960
Now, if you see something interesting about meta, we'll look at the full lot, a round lot there.

439
00:39:05,960 --> 00:39:11,960
Notice there's a bid and an ask. And notice this is the bid.

440
00:39:11,960 --> 00:39:14,960
That is what makes that yield.

441
00:39:14,960 --> 00:39:20,960
There is the ask. That is what makes that yield.

442
00:39:20,960 --> 00:39:26,960
So I know the price, and I know the term to maturity. I can get the yield.

443
00:39:26,960 --> 00:39:31,960
If I know the yield, I could actually back up and get the price, but you know, that's not really how it works.

444
00:39:31,960 --> 00:39:33,960
Everything is traded in price.

445
00:39:33,960 --> 00:39:42,960
So the prices that are being argued and negotiated between buyers and sellers of bonds and all that, that's what you see.

446
00:39:42,960 --> 00:39:47,960
But the yield is what really matters. That is what is implied by the price.

447
00:39:47,960 --> 00:39:52,960
And this is a hell of a thing.

448
00:39:52,960 --> 00:39:56,960
Notice that lower price makes a higher yield on the bid.

449
00:39:56,960 --> 00:40:02,960
The higher price on the ask makes for a lower yield on the ask.

450
00:40:02,960 --> 00:40:08,960
That's a price and yield relationship.

451
00:40:08,960 --> 00:40:13,960
That is actually, that's kind of a spread there on that.

452
00:40:13,960 --> 00:40:18,960
But, well, there you go. But notice that it's the mark.

453
00:40:18,960 --> 00:40:26,960
And I can't remember what I told you. The word mark means the middle point between a bid and an ask.

454
00:40:26,960 --> 00:40:32,960
And that's the mark. If I look at the mark here, it's a little below par.

455
00:40:32,960 --> 00:40:36,960
And notice these are quotes. They're not prices, they're quotes. You see them?

456
00:40:36,960 --> 00:40:38,960
Those are on the hundreds.

457
00:40:38,960 --> 00:40:45,960
And notice that the bid is a little discount. The ask is a little premium.

458
00:40:45,960 --> 00:40:52,960
The mark, that average, is a little, a tiny bit of a discount between them.

459
00:40:52,960 --> 00:41:02,960
You do have to be cautious about this because all the quotation services, they usually would just give you the mark.

460
00:41:02,960 --> 00:41:07,960
And sometimes that mark can be the midpoint between a pretty wide thing here.

461
00:41:07,960 --> 00:41:16,960
In this case, you notice that that price difference between the bid and the ask, that has a rather significant,

462
00:41:16,960 --> 00:41:25,960
20-some basis points on the yield between the bid and the ask. So if I were to buy this bond,

463
00:41:25,960 --> 00:41:31,960
I would pay $1,002.54.

464
00:41:31,960 --> 00:41:42,960
If I were to sell one of these meta bonds, I would receive $995.

465
00:41:42,960 --> 00:41:47,960
You follow it? This is kind of bringing back some of the stuff. And don't worry, we just keep doing this.

466
00:41:47,960 --> 00:41:51,960
I kind of want you to come out of this course very comfortable with this.

467
00:41:51,960 --> 00:41:57,960
And I don't expect you to be comfortable with it until we've beaten it up all semester.

468
00:41:57,960 --> 00:42:02,960
So don't sweat it if this is still looking a little bit Greek to you.

469
00:42:02,960 --> 00:42:08,960
Notice that the odd lot, you see how the, oh, damn.

470
00:42:08,960 --> 00:42:17,960
The odd lot, you notice that that bid price is lower and the ask price is lower.

471
00:42:17,960 --> 00:42:21,960
So buying odd lots. Well, I'd like to buy 12 of these bonds.

472
00:42:21,960 --> 00:42:26,960
You're going to get smacked for that compared to if you buy 100 of them.

473
00:42:26,960 --> 00:42:31,960
That's not, it used to be true in stocks. Odd lots, you always bought in hundreds.

474
00:42:31,960 --> 00:42:39,960
Did I even say that to this day? I sell a problem, you buy a round lot, but that's not how it is now.

475
00:42:39,960 --> 00:42:46,960
That's meta. But notice that meta, this is a 4.6% bond.

476
00:42:46,960 --> 00:42:52,960
It's due on the 15th of May, 2028.

477
00:42:52,960 --> 00:43:03,960
Now, for the purposes of this course, I'm not going to, you can quibble about those differences between the settlement

478
00:43:03,960 --> 00:43:12,960
and the date of maturity because that actually does affect the price a little bit and therefore the yield.

479
00:43:12,960 --> 00:43:17,960
But for my purposes in this course, we would just say the term of this bond is four years.

480
00:43:17,960 --> 00:43:23,960
Well, technically it's four years and two months and three days.

481
00:43:23,960 --> 00:43:28,960
Quit that. We're not going to do it that fine. We're just going to do years.

482
00:43:28,960 --> 00:43:36,960
Okay. So for my purposes, you would say the term of this bond is four.

483
00:43:36,960 --> 00:43:41,960
Okay, see that one? Okay, now I pulled up a couple more here for us.

484
00:43:41,960 --> 00:43:48,960
Tesla.

485
00:43:48,960 --> 00:43:52,960
Notice that they don't even talk about odd lots with Tesla.

486
00:43:52,960 --> 00:43:59,960
Good luck with that if you want to try to find and do an odd lot.

487
00:43:59,960 --> 00:44:03,960
But there you go.

488
00:44:03,960 --> 00:44:05,960
It's a 5.3% coupon.

489
00:44:05,960 --> 00:44:18,960
That means that whenever this bond was issued, its risk was commensurate with 5.3% interest rate.

490
00:44:18,960 --> 00:44:26,960
Now, this bond has a very short time to maturity and you're going to see that that affects the price of a bond.

491
00:44:26,960 --> 00:44:32,960
As bonds get closer to maturity, they will, if everything else, if everything's normal,

492
00:44:32,960 --> 00:44:36,960
they'll get closer and closer to par.

493
00:44:36,960 --> 00:44:43,960
This bond is only, well, it's less, no, it's a little more than a year.

494
00:44:43,960 --> 00:44:48,960
It's a little more than a year, two years, I'm sorry. No, a little more than one year.

495
00:44:48,960 --> 00:44:55,960
So this bond will start moving, it's getting closer and closer to par value.

496
00:44:55,960 --> 00:44:59,960
You're saying, oh, wait a minute, fat boy, that thing looks like it's at a premium.

497
00:44:59,960 --> 00:45:02,960
That's, look at the yield.

498
00:45:02,960 --> 00:45:08,960
This is what the market says the bond should be paying.

499
00:45:08,960 --> 00:45:11,960
It should be paying 4.534%.

500
00:45:11,960 --> 00:45:16,960
It's paying a lot more than that. It's paying 5.3%.

501
00:45:16,960 --> 00:45:19,960
That means it is selling at a premium.

502
00:45:19,960 --> 00:45:23,960
Investors are going to buy this bond because it's paying more than it should.

503
00:45:23,960 --> 00:45:25,960
The coupon is higher than it should be.

504
00:45:25,960 --> 00:45:33,960
So if you buy on the bond, that will drive the premium, the price up to a premium to par on it.

505
00:45:33,960 --> 00:45:38,960
Now you notice that the bid and the ask are identical on this.

506
00:45:38,960 --> 00:45:45,960
That probably means that there is a lot of trading going on in the bond.

507
00:45:45,960 --> 00:45:47,960
A lot going on in the bond.

508
00:45:47,960 --> 00:45:54,960
The bid and ask tighten, the spread tightens, the more active the market is for the bond.

509
00:45:54,960 --> 00:46:04,960
In this case, there must be a lot going on with that bond right now.

510
00:46:04,960 --> 00:46:09,960
Now, I meant to keep up that other one and I didn't.

511
00:46:09,960 --> 00:46:12,960
I'm going to keep this one up here.

512
00:46:12,960 --> 00:46:19,960
The reason being that we should be able to go into the Excel spreadsheet

513
00:46:19,960 --> 00:46:24,960
and put in that quote and get that yield.

514
00:46:24,960 --> 00:46:28,960
Or put in that yield and get that quote in the Excel spreadsheet.

515
00:46:28,960 --> 00:46:37,960
You will see that we don't quite get it because there is a little bit of haziness.

516
00:46:37,960 --> 00:46:41,960
One thing is that it's not exactly a term of one year.

517
00:46:41,960 --> 00:46:46,960
That will make our calculation off a little bit.

518
00:46:46,960 --> 00:46:51,960
You can do it in my spreadsheet with exactly the year and the decimal of the year.

519
00:46:51,960 --> 00:46:55,960
But, I'm not going to do that.

520
00:46:55,960 --> 00:47:03,960
But, for the most part, we should be able to put into the Excel spreadsheet the bid, maybe the mark.

521
00:47:03,960 --> 00:47:05,960
Put in the mark maybe.

522
00:47:05,960 --> 00:47:09,960
That's easy enough. It's 102.68.

523
00:47:09,960 --> 00:47:12,960
And we should get that yield spit out.

524
00:47:12,960 --> 00:47:20,960
It will be perfect, like I said, because you'd have to put in the year and the part of the year into it.

525
00:47:20,960 --> 00:47:26,960
Now, remember also that these are clean quotes. These are not dirties.

526
00:47:26,960 --> 00:47:32,960
So now let's go over here and look at Netflix.

527
00:47:32,960 --> 00:47:37,960
Netflix is paying 5.375%.

528
00:47:37,960 --> 00:47:42,960
Now, of course, this was money that was borrowed when interest rates were higher.

529
00:47:42,960 --> 00:47:45,960
Overall, interest rates have fallen.

530
00:47:45,960 --> 00:47:57,960
So Netflix, like many bonds, will be selling at premiums to par because the market doesn't want as much now as it did back then when this was selling.

531
00:47:57,960 --> 00:48:04,960
Now, this bond, it has a term of five years.

532
00:48:04,960 --> 00:48:08,960
Whoa, that's quite a spread there.

533
00:48:08,960 --> 00:48:12,960
Okay, now this is a full lot. This is a round lot.

534
00:48:12,960 --> 00:48:22,960
101.009 on the bid, 101.564 on the ask.

535
00:48:22,960 --> 00:48:25,960
And as you can see, it's effect.

536
00:48:25,960 --> 00:48:35,960
The higher price of the ask makes for a lower percentage on the yield.

537
00:48:35,960 --> 00:48:38,960
So let's go back here to Tesla.

538
00:48:38,960 --> 00:48:51,960
And now let me introduce you to your spreadsheet that will save your bacon files.

539
00:48:51,960 --> 00:48:55,960
In your files, you get your spreadsheets.

540
00:48:55,960 --> 00:48:59,960
Now, this is called the bond calculations enhanced.

541
00:48:59,960 --> 00:49:07,960
I've made it about as easy as I can for you to do it here instead of on a financial.

542
00:49:07,960 --> 00:49:11,960
You can do these on TI-83. They're not that hard to do on there. I won't show you.

543
00:49:11,960 --> 00:49:19,960
Doing these with tables, good God, that's way too much like work.

544
00:49:19,960 --> 00:49:31,960
So we're going to pull up this, download it.

545
00:49:31,960 --> 00:49:32,960
Okay, enable editing.

546
00:49:32,960 --> 00:49:36,960
Now, as you can see, it works like this.

547
00:49:36,960 --> 00:49:40,960
I've got a couple of stories so we can put some numbers in here.

548
00:49:40,960 --> 00:49:50,960
But this will calculate a bond price if you know the yield.

549
00:49:50,960 --> 00:49:56,960
This will calculate a yield if you know a price.

550
00:49:56,960 --> 00:50:05,960
Now, this one, everything is on dollars, thousand and you get out thousands.

551
00:50:05,960 --> 00:50:15,960
For some reason, Excel wants you to do the yields on the hundreds.

552
00:50:15,960 --> 00:50:20,960
Don't ask me why, but that's what they want.

553
00:50:20,960 --> 00:50:28,960
Excel is Microsoft and Microsoft is Bill Gates, so whatever Bill Gates wants, the universe gives him.

554
00:50:28,960 --> 00:50:41,960
Okay, so now I've made these to three decimal places of accuracy on these rates and yields and coupons and all that kind of stuff.

555
00:50:41,960 --> 00:50:47,960
I would ask you on an exam or a quiz just for two decimal places,

556
00:50:47,960 --> 00:50:55,960
but I give it because oftentimes you'll see these at three decimal places, especially coupons.

557
00:50:55,960 --> 00:51:07,960
I saw a CVS bond, the coupon was like 6.3255.

558
00:51:07,960 --> 00:51:12,960
They can even go out four decimal places, but there's that.

559
00:51:12,960 --> 00:51:20,960
Okay, so in this one, I have JCG 6.225%, 2035.

560
00:51:20,960 --> 00:51:29,960
Okay, so that means that the coupon, that's what's right after the name of the bond.

561
00:51:29,960 --> 00:51:36,960
Again, I'm using stock ticker symbols because the names of bonds are just ridiculous.

562
00:51:36,960 --> 00:51:42,960
6.225 means that's the coupon, so that's what I put in the annual coupon.

563
00:51:42,960 --> 00:51:56,960
And 2035, so that means that you would do the term, and this one, just take 2035 minus 2024, so that would be 11 years.

564
00:51:56,960 --> 00:52:00,960
And the coupons per year, I put it in two.

565
00:52:00,960 --> 00:52:10,960
Your homework in Cengage starts with one and then they go to two, but with Excel, you know, it's not a big thing.

566
00:52:10,960 --> 00:52:15,960
And out snorts your price that easy.

567
00:52:15,960 --> 00:52:19,960
And as you can see, this is selling at a premium to par.

568
00:52:19,960 --> 00:52:31,960
Well, that's obviously right because the yield, the market said this should pay only 5.75%, but the coupon is much better than that.

569
00:52:31,960 --> 00:52:39,960
So, of course, investors are going to drive the prices that bond up.

570
00:52:39,960 --> 00:52:44,960
This is a classic question on a quiz and an exam.

571
00:52:44,960 --> 00:52:54,960
If the coupon is above the yield, then the price, then the bond will sell at a premium to par.

572
00:52:54,960 --> 00:52:58,960
If the coupon is above the yield, premium.

573
00:52:58,960 --> 00:53:03,960
If the yield is above the coupon, discount.

574
00:53:03,960 --> 00:53:11,960
What would happen if I said that this yield to maturity was actually 6.5%?

575
00:53:11,960 --> 00:53:16,960
Well, now, I meant 6.5%, well, 6.5%.

576
00:53:16,960 --> 00:53:20,960
Well, now, see how it sells at a discount to par?

577
00:53:20,960 --> 00:53:24,960
You can just play it back and forth until you get used to it.

578
00:53:24,960 --> 00:53:34,960
Put in yield above coupon, yield below coupon, and spank me Jesus.

579
00:53:34,960 --> 00:53:37,960
That's all there is to it.

580
00:53:37,960 --> 00:53:45,960
Don't make this as hard as it used to be.

581
00:53:45,960 --> 00:53:51,960
I don't make you walk through five feet of snow to get to campus.

582
00:53:51,960 --> 00:53:54,960
We plow the roads nowadays.

583
00:53:54,960 --> 00:54:01,960
This is one of the benefits of the 21st century, is that these are a lot quicker to do.

584
00:54:01,960 --> 00:54:09,960
That means that you can have more time just to feel around and see what changing different parameters does.

585
00:54:09,960 --> 00:54:11,960
I want you to know something.

586
00:54:11,960 --> 00:54:12,960
Watch this.

587
00:54:12,960 --> 00:54:19,960
I'm going to leave it with the coupon at 6.225% and the yield to maturity at 6.50%.

588
00:54:19,960 --> 00:54:26,960
Now, I want you to watch the price as we get closer to the, as the term approaches zero.

589
00:54:26,960 --> 00:54:31,960
Let's say now that we're only eight years from the maturity.

590
00:54:31,960 --> 00:54:36,960
Watch what happens to the price.

591
00:54:36,960 --> 00:54:40,960
Let's say we're only five years.

592
00:54:40,960 --> 00:54:43,960
Spank me Jesus, look.

593
00:54:43,960 --> 00:54:52,960
It's approaching par because there's less volatility possible, less risk.

594
00:54:52,960 --> 00:54:57,960
So let's get it down to two years.

595
00:54:57,960 --> 00:55:00,960
Whoa.

596
00:55:00,960 --> 00:55:03,960
To one year.

597
00:55:03,960 --> 00:55:12,960
Well, of course it's going to get closer to a thousand dollars because in just a year you're going to get a thousand dollars.

598
00:55:12,960 --> 00:55:17,960
Let's look at six months.

599
00:55:17,960 --> 00:55:20,960
Wow.

600
00:55:20,960 --> 00:55:21,960
Well, let's see.

601
00:55:21,960 --> 00:55:23,960
I don't know if it will do this or not.

602
00:55:23,960 --> 00:55:24,960
I actually don't.

603
00:55:24,960 --> 00:55:31,960
What happens if you write on the payment date, the end of the bond?

604
00:55:31,960 --> 00:55:34,960
Well, I'll be darned.

605
00:55:34,960 --> 00:55:39,960
Of course it's going to be worth a thousand because you're getting a thousand dollars that day.

606
00:55:39,960 --> 00:55:42,960
You see it?

607
00:55:42,960 --> 00:55:43,960
Not complicated.

608
00:55:43,960 --> 00:55:45,960
Now let's go over here to yield.

609
00:55:45,960 --> 00:55:53,960
Now, as I told you, I've set up this one so that settlement is on the day.

610
00:55:53,960 --> 00:55:56,960
Okay.

611
00:55:56,960 --> 00:56:08,960
And you notice that I use the function now so that whenever you pull up the spreadsheet, you will get today the data that you're, that you're on that day.

612
00:56:08,960 --> 00:56:10,960
It makes it easier.

613
00:56:10,960 --> 00:56:14,960
And then the term, I put the maturity date.

614
00:56:14,960 --> 00:56:17,960
You have to put in the term.

615
00:56:17,960 --> 00:56:21,960
And what it will do is put in the maturity date for you.

616
00:56:21,960 --> 00:56:31,960
So in other words, when you put in 12 years, it takes 12 years from this date and tax the maturity date on.

617
00:56:31,960 --> 00:56:33,960
Don't mess with either of these.

618
00:56:33,960 --> 00:56:35,960
Just put in the term.

619
00:56:35,960 --> 00:56:40,960
It has already put in today as a settlement date.

620
00:56:40,960 --> 00:56:46,960
And when you put in the term, it will put in that many years after that date.

621
00:56:46,960 --> 00:56:49,960
So watch what would happen if I put in 16 years.

622
00:56:49,960 --> 00:56:52,960
Watch the maturity.

623
00:56:52,960 --> 00:56:54,960
See it?

624
00:56:54,960 --> 00:56:56,960
It calculates it for you.

625
00:56:56,960 --> 00:56:59,960
So you don't have to worry about that.

626
00:56:59,960 --> 00:57:04,960
Excel works hard so we don't have to.

627
00:57:04,960 --> 00:57:08,960
Now, let's, coupon, okay, now, redemption.

628
00:57:08,960 --> 00:57:11,960
I put in the hundred there.

629
00:57:11,960 --> 00:57:15,960
For God's sake.

630
00:57:15,960 --> 00:57:21,960
You have to put in the price, equals the price divided by 10, unless you're given a quote.

631
00:57:21,960 --> 00:57:27,960
So if I said, in this example, I said it's selling for $942.35.

632
00:57:27,960 --> 00:57:41,960
So you have to say equals $942.35 divided by 10.

633
00:57:41,960 --> 00:57:43,960
So now let's do this one.

634
00:57:43,960 --> 00:57:48,960
8.2% coupon, do 2035.

635
00:57:48,960 --> 00:57:52,960
So that would be 11 years from now.

636
00:57:52,960 --> 00:57:55,960
And redemption, that's all I have.

637
00:57:55,960 --> 00:58:00,960
Let's say that we get one coupon a year.

638
00:58:00,960 --> 00:58:05,960
So there's your yield line.

639
00:58:05,960 --> 00:58:08,960
You notice that this bond was selling at a discount to par.

640
00:58:08,960 --> 00:58:11,960
Do you see 942.25?

641
00:58:11,960 --> 00:58:14,960
It's selling at a discount to par.

642
00:58:14,960 --> 00:58:21,960
That means that the yield, the market wants more than the coupon is paying.

643
00:58:21,960 --> 00:58:26,960
And they'll drive the price down until it meets that.

644
00:58:26,960 --> 00:58:28,960
Watch this.

645
00:58:28,960 --> 00:58:40,960
Suppose that I put the price at $1022.

646
00:58:40,960 --> 00:58:45,960
Watch yield to maturity go below the coupon.

647
00:58:45,960 --> 00:58:47,960
What?

648
00:58:47,960 --> 00:58:52,960
I'm just testing you on that. I'll have to fix that.

649
00:58:52,960 --> 00:58:57,960
Oh, oh, equals 1000.

650
00:58:57,960 --> 00:59:02,960
Practice what I preach, fat boy.

651
00:59:02,960 --> 00:59:05,960
I was just testing you there.

652
00:59:05,960 --> 00:59:07,960
7.89%.

653
00:59:07,960 --> 00:59:11,960
See how now that it's selling at a premium to par,

654
00:59:11,960 --> 00:59:19,960
$942.25, rather, it's selling at $1022.

655
00:59:19,960 --> 00:59:26,960
That means that the yield will be below the coupon.

656
00:59:26,960 --> 00:59:38,960
Fix that in that little thing right there.

657
00:59:38,960 --> 00:59:43,960
There you go.

658
00:59:43,960 --> 00:59:47,960
And that's all there is to it to this.

659
00:59:47,960 --> 00:59:52,960
This used to take up a lecture and a half just going through the math,

660
00:59:52,960 --> 00:59:55,960
especially when all we had were formulas.

661
00:59:55,960 --> 00:59:59,960
Because the price isn't hard to find mathematically.

662
00:59:59,960 --> 01:00:02,960
The yield is a bear.

663
01:00:02,960 --> 01:00:06,960
Because you have to work back and forth until you get the price

664
01:00:06,960 --> 01:00:14,960
to be close to where it will be matched by the yield.

665
01:00:14,960 --> 01:00:17,960
Okay. But there you go.

666
01:00:17,960 --> 01:00:20,960
That is how you do the Excel version of this.

667
01:00:20,960 --> 01:00:24,960
Now, let me go back here.

668
01:00:24,960 --> 01:00:27,960
Let me try Tesla.

669
01:00:27,960 --> 01:00:31,960
The quote is 102.68.

670
01:00:31,960 --> 01:00:33,960
So let's try, and that one, what?

671
01:00:33,960 --> 01:00:40,960
Has one year left, a little more than a year.

672
01:00:40,960 --> 01:00:44,960
We'll do two coupons to make it real.

673
01:00:44,960 --> 01:00:58,960
One year, and we'll make the price 102.68.

674
01:00:58,960 --> 01:01:00,960
Now, before I do this, let's see what,

675
01:01:00,960 --> 01:01:07,960
and I warn you, we'll be right because of that slight more than a year.

676
01:01:07,960 --> 01:01:13,960
4.534.

677
01:01:13,960 --> 01:01:17,960
Whoa, that one is really off.

678
01:01:17,960 --> 01:01:19,960
Oh, the coupon.

679
01:01:19,960 --> 01:01:21,960
De, de, de.

680
01:01:21,960 --> 01:01:26,960
5.3.

681
01:01:26,960 --> 01:01:31,960
Whoa, that's even lower. Why?

682
01:01:31,960 --> 01:01:33,960
There might be something unusual about that bond.

683
01:01:33,960 --> 01:01:37,960
That's a real whack difference.

684
01:01:37,960 --> 01:01:47,960
102.68, one year, two payments a year.

685
01:01:47,960 --> 01:01:51,960
Yeah, that is really off on Tesla.

686
01:01:51,960 --> 01:01:53,960
That's really off.

687
01:01:53,960 --> 01:01:56,960
102.68, yeah.

688
01:01:56,960 --> 01:01:59,960
Okay, okay.

689
01:01:59,960 --> 01:02:01,960
That one didn't come through very clean.

690
01:02:01,960 --> 01:02:04,960
Let me try Netflix.

691
01:02:04,960 --> 01:02:06,960
What's the mark on that?

692
01:02:06,960 --> 01:02:19,960
Let me pull up a calculator here.

693
01:02:19,960 --> 01:02:33,960
101.009 plus 101.564 equals, divided by two,

694
01:02:33,960 --> 01:02:38,960
so the mark is 101.29.

695
01:02:38,960 --> 01:02:41,960
Let me just do 101.29 on it.

696
01:02:41,960 --> 01:02:53,960
101.29, 101.29. How many years does it have left?

697
01:02:53,960 --> 01:02:57,960
Five years, five points, five years actually.

698
01:02:57,960 --> 01:03:00,960
Five years.

699
01:03:00,960 --> 01:03:02,960
And what's the coupon on it?

700
01:03:02,960 --> 01:03:11,960
Whoops. 5.375.

701
01:03:11,960 --> 01:03:21,960
I'll bet this one's going to be whack too.

702
01:03:21,960 --> 01:03:25,960
That's not bad. That's not bad.

703
01:03:25,960 --> 01:03:29,960
And that's, I don't know what's going on with that Tesla bond,

704
01:03:29,960 --> 01:03:32,960
but yeah, this is more what I would expect.

705
01:03:32,960 --> 01:03:34,960
Let me try something here.

706
01:03:34,960 --> 01:03:40,960
Let me put in 5.5 years, March to August.

707
01:03:40,960 --> 01:03:43,960
Didn't really change it much at all.

708
01:03:43,960 --> 01:03:44,960
Yeah, that's not bad.

709
01:03:44,960 --> 01:03:48,960
Like I said, the Excel will not reflect perfectly the market

710
01:03:48,960 --> 01:03:51,960
unless I do some other fancy stuff.

711
01:03:51,960 --> 01:03:56,960
But anyway, that's a little better.

712
01:03:56,960 --> 01:04:05,960
Actually, that is the mark.

713
01:04:05,960 --> 01:04:08,960
That might be very close to the mark yield.

714
01:04:08,960 --> 01:04:12,960
See, these are the bid and ask yields.

715
01:04:12,960 --> 01:04:16,960
Let me do one more, just out of curiosity.

716
01:04:16,960 --> 01:04:27,960
Try another one.

717
01:04:27,960 --> 01:04:28,960
Let me go back here.

718
01:04:28,960 --> 01:04:32,960
I'm just curious about something, Tesla.

719
01:04:32,960 --> 01:04:40,960
That was, the maturity on that one was August 18th of 2017.

720
01:04:40,960 --> 01:04:45,960
So it originally was an eight-year note.

721
01:04:45,960 --> 01:04:50,960
This is a note, not even a bond.

722
01:04:50,960 --> 01:04:55,960
It has 1.408 years left.

723
01:04:55,960 --> 01:04:57,960
1.408 years left.

724
01:04:57,960 --> 01:05:03,960
There's the quote, issue coupon fixed semi-annually.

725
01:05:03,960 --> 01:05:04,960
This is a debenture.

726
01:05:04,960 --> 01:05:05,960
Do you see it's a debenture?

727
01:05:05,960 --> 01:05:08,960
It's unsecured.

728
01:05:08,960 --> 01:05:12,960
Remember, it's a mortgage bond or a collateralized bond,

729
01:05:12,960 --> 01:05:13,960
or it's a debenture.

730
01:05:13,960 --> 01:05:18,960
A debenture is unsecured.

731
01:05:18,960 --> 01:05:21,960
There's its actual name.

732
01:05:21,960 --> 01:05:28,960
It's in, they borrowed 100,000, 1.8 billion?

733
01:05:28,960 --> 01:05:31,960
Holy sh...

734
01:05:31,960 --> 01:05:37,960
You have to buy 2,000 of them to join,

735
01:05:37,960 --> 01:05:40,960
and you buy in 1,000 increments.

736
01:05:40,960 --> 01:05:45,960
High yield, which means that's a fancy term for a junk bond.

737
01:05:45,960 --> 01:05:48,960
It's not investment grade.

738
01:05:48,960 --> 01:05:55,960
That's what that means.

739
01:05:55,960 --> 01:05:59,960
Actually, C-bond is not bad if you know what bond you want.

740
01:05:59,960 --> 01:06:02,960
C-bond doesn't suck too much.

741
01:06:02,960 --> 01:06:03,960
Let me try another one.

742
01:06:03,960 --> 01:06:07,960
Is there any bond that sounds interesting right now?

743
01:06:07,960 --> 01:06:09,960
Oh, here's one.

744
01:06:09,960 --> 01:06:22,960
NVDA.

745
01:06:22,960 --> 01:06:25,960
That's an international bond.

746
01:06:25,960 --> 01:06:29,960
2.85% coupon.

747
01:06:29,960 --> 01:06:33,960
Doesn't even have any quotations on it.

748
01:06:33,960 --> 01:06:36,960
Oh, it hasn't been issued yet.

749
01:06:36,960 --> 01:06:38,960
Oh.

750
01:06:38,960 --> 01:06:39,960
That's interesting.

751
01:06:39,960 --> 01:06:44,960
Well, let me try one more here.

752
01:06:44,960 --> 01:06:45,960
Anyone got a bond?

753
01:06:45,960 --> 01:06:52,960
I'm out of thinking right now.

754
01:06:52,960 --> 01:06:54,960
What would be a bond?

755
01:06:54,960 --> 01:06:55,960
Come on.

756
01:06:55,960 --> 01:06:59,960
Someone help me out here.

757
01:06:59,960 --> 01:07:03,960
What the hell?

758
01:07:03,960 --> 01:07:08,960
RIVM.

759
01:07:08,960 --> 01:07:15,960
Do they even have bonds?

760
01:07:15,960 --> 01:07:18,960
There's Rivian.

761
01:07:18,960 --> 01:07:20,960
That's a note.

762
01:07:20,960 --> 01:07:21,960
It's got five years left.

763
01:07:21,960 --> 01:07:24,960
Oh, look at that.

764
01:07:24,960 --> 01:07:30,960
Just almost exactly five years left to maturity remaining the term is.

765
01:07:30,960 --> 01:07:38,960
4.625.

766
01:07:38,960 --> 01:07:43,960
That was a $1.5 billion bond.

767
01:07:43,960 --> 01:07:45,960
And it's not even giving anything.

768
01:07:45,960 --> 01:07:47,960
This is one that's still out there.

769
01:07:47,960 --> 01:07:48,960
Oh, I see.

770
01:07:48,960 --> 01:07:50,960
They won't let me unless I buy the...

771
01:07:50,960 --> 01:07:51,960
I get it.

772
01:07:51,960 --> 01:07:53,960
You have to buy a subscription to get that one.

773
01:07:53,960 --> 01:07:55,960
La dee dah.

774
01:07:55,960 --> 01:07:57,960
But anyway, you see what I mean.

775
01:07:57,960 --> 01:08:07,960
This is your bacon saver for this homework for problems on exam.

776
01:08:07,960 --> 01:08:14,960
Now, as far as I would be concerned on an exam, as far as calculations go,

777
01:08:14,960 --> 01:08:19,960
I would not go any further than finding a price given a yield

778
01:08:19,960 --> 01:08:24,960
or finding a yield given a price.

779
01:08:24,960 --> 01:08:30,960
I might ask you for some other qualitative stuff about bonds

780
01:08:30,960 --> 01:08:36,960
or the relationship between bond and yield, coupon and yield,

781
01:08:36,960 --> 01:08:38,960
premium discount and all that.

782
01:08:38,960 --> 01:08:41,960
But if you can master what I've shown you here,

783
01:08:41,960 --> 01:08:48,960
you've got what you need to be a darn fine bond trader

784
01:08:48,960 --> 01:08:54,960
and live the exciting exotic life of fixed income securities.

785
01:08:54,960 --> 01:08:55,960
That's all I have for you today.

786
01:08:55,960 --> 01:09:19,960
I thank you.