The Illinois State Collegiate Compendium Academic Lectures in Business and Economics.
This is Business Finance, FIL 190, Spring Semester 2024.
Welcome back for the second round of this two round lively show called FIL 190.
I'm glad to see you all look well rested or maybe not well rested.
You look like you're in good shape for this next round.
If you have questions on the midterm, stop by my office or send me an email message.
The overall average was very good, which means I'll probably have to make the final very hard
so that I can get my quota of failed students.
Nope. Go ahead.
We go through, this side of the course is more mathematical and also deeper conceptually than the first half.
Although the mathematical part, I guarantee you, you'll have a spreadsheet for about anything
that you would want to do in this part of the course.
So nothing to panic about.
We will be going through a spreadsheet today for bonds.
But before we do that, we always look at the numbers and see just how grim the markets are right now.
We actually have a really serious bold egg coming on right now.
Look at those jumps and it's still, the momentum is still upward as you can see those spark charts
are all pointing that way up toward the sky.
So it's just a good day.
We had sour days last week. It was just a grouchy market.
It wasn't anything terrible, but it just didn't seem to want to find much to be chipper about.
And now all of a sudden, apparently the bluebird of happiness showed up this morning
beating on the door to get in out of the cold.
And so we have this happening.
Typically, as is typical, the Dow is up the least, a little more than a third of a percent.
The somewhat riskier portfolio, the S&P 500 is up more than 1%, a little more than a percent.
And the NASDAQ, the riskiest portfolio, is having the best, strongest reaction
to whatever the good news is that's coming through the market.
And we do have the NASDAQ up more than a percent and a half already today.
So, I don't know, something like this, it should slow down as the day proceeds.
But if it went like this the rest of the day, boy, this would just be a dandy day.
Especially for me, sitting out there with call options hanging in the balance.
I think it's lost money last week, but you can see this is good news.
Crude has found the other side of that 72 to 79, and it is staying there.
It is highly volatile, but it seems to now be interested in staying above $80 a barrel.
And there are reasons for that.
One of them is that there is noticeably more demand for hydrocarbon products.
And also, there's a little bit of a spook.
I've heard a couple mentions from traders that there's some kind of a buddy thing
going on between Saudi Arabia and Russia to cut production to bring up oil prices.
And that notwithstanding price cap on Russian oil,
it seems to have gotten the market a little more interested in finding a somewhat higher
price cap down for the price of oil.
But as you can see from that spark chart, a lot of volatility in it right now.
And that means uncertainty, of course.
And that's one of the things here in finance we talk a lot about.
Uncertainty, which means risk.
And risk is something that drives prices of some things up and prices of other things down,
depending upon what kind of a market you're talking about.
And there you go.
Now, running over here and having a quick look at other happy things,
gold has really, really gotten up there above 2000 neckline.
We're in a course right now in a time when necklines are holding
and then they are giving way to higher prices.
Gold is up above 2150 an ounce, and that's some pretty dramatic territory.
It climbed out of a hole that started last night,
but I don't know what to say about that other than that the gold bugs are pretty happy right now.
Now, the 10-year bond, and this is where we get into the lecture today,
we have the yield that has shown itself.
Right now it is at 4.31, and that's up one basis point.
As you can see, there was a spike this morning.
That means yields went up, so that means that prices went down,
which means that there was a sell-off in bonds early on.
But now that has petered out.
As you can see, the spark chart is plowing back down.
But that was good news, we don't need the noise of yields being that high.
Part of that is because of the Fed.
The Federal Reserve, it's sending a mixed signal.
No, we're not going to do any rate drops right now because there's still signs of inflation,
and it's a little troubling that it's still resisting.
However, the Fed chairman also gave hints that later in the year there will be rate cuts.
So it's one of those things where the markets are saying,
okay, what's going on, which is it right now?
Should we move yields on the expectation of future rate cuts,
or should we hold rates, the yields high, based upon the fact that the yields aren't going to go down for a while?
And that causes some uncertainty, some turbulence in the market.
I don't know, the Fed right now, they're fairly good.
I mean, they know what they're doing, and it almost makes you wonder if they want to keep the markets
guessing a little bit about where things are right at the current time.
Okay, moving along here, that's enough of that fun time.
So over here, Nikkei just had this rise that was right away,
and then as you can see, through the day in Tokyo, which was last night for us,
it just floated for a while, but it still seemed to have a little bit of upward trend after that first big pop,
finished off 2 and 2 thirds percent up.
That is a really strong day.
It kind of gives us, makes us wonder, is that what's going to happen here today?
Is it going to have a steadily increasing bear day, a bull day today?
And the Financial Times, of course, it's the British, so it was all over the place.
Look at that kangaroo going on.
They're still open for business right now.
They're still trading over there in their afternoon.
But as you can see, volatility, and then there was a spike, and then a sell-off,
and there was a bull spike, and then profit-taking, and then it just dropped.
The floor just dropped out, and so right now it's sitting almost right where it started.
The sun came up over in London.
But all of that, having been said, here we are, sitting here in this happy time.
We've got a nice bull market going on today,
and so that means everyone throw all your money into the market
so you can lose it tomorrow when the bears come back, or something like that.
Let me switch gears here a little bit.
This is about bonds.
I gave you a basic outline of bonds yesterday.
Or rather, it seems like it was yesterday, but it was more than a week ago
we talked about bonds, and this gets into more of the technical side of bonds.
Finances, prices, yields, and all of that.
Bonds are not exciting for the most part, unless a company declares bankruptcy,
and then the bond market gets a little bit bouncy about that.
However, they are a huge part of investments in many situations.
Corporate investments are oftentimes in bonds.
Institutional investors of various kinds, trust funds, invest in bonds,
pension funds, investment bonds, it's just there is a vast market for them.
It doesn't sound like an exciting life.
I know traders who've been offered positions paying well on the bond desk,
and they just don't want to do it.
They said that's not the exciting thing.
It's sort of like Air Force and Navy pilots.
They don't want to fly any plane that has an A on it.
They want an F because A means attack, F means the big fighter pilot.
Same thing in our market, in our world too.
A lot of people say, no, the bond market, that's dull.
It pays awfully well though, and it's not a high pressure kind of life,
but it is one where you are held to the standard.
You're investing in bonds because that's what you're supposed to do.
The reason you're investing in bonds is because generally speaking, they're safe.
If a bond becomes unsafe, then you need to be able to get rid of that.
First, be aware that the bond is getting dodgy and get out from under it
before you lose a lot of the company's investment.
It puts the portfolio at great risk.
Now, in bond markets, the risk is oftentimes, start determining risk by its rating.
Ratings are done by S&P, Standard & Poor's.
They're done by Moody's, and some are done by Fitch.
They have their own lettering system.
There's some talk about it in the book.
Most of the time, for general purposes, we look at the S&P rating,
the A, A, A, and the B's and all of that.
That's where we usually kind of center ourselves, is on the S&P ratings,
although the other ones are worth it, too.
I have a story that I could tell you about Moody's ratings.
Sometimes I'm reticent to tell you the story that these ratings,
sometimes they are motivated by other than a completely honest look at the bond
and the company backing the bond, behind the bond.
In fact, it's pretty well known that S&P has a negative bias against government debt securities.
They just downgraded one government bond just a few weeks ago, I believe.
And of course, that's just absolutely ludicrous.
It's as if they're saying there is a risk of default of this debt instrument,
and there is not.
It's just not going to happen.
And all they're doing is carrying out a long-term feud that they've had with the U.S. government
because the U.S. government kicked their asses for improperly rating very bad bonds
more than almost a decade and a half ago.
And Moody and Standard & Poor's has been a bitch ever since to the government
because the government spanked them for it.
On the other side, in my own personal experience,
and I won't tell you what the rating agency is,
but I would get small companies when they wanted to issue debt securities.
They wanted to borrow by issuing bonds.
I found out that in the case of these small companies,
the more I paid, or the more I got my client to pay,
the more favorable the rating was going to be to a certain extent.
And that, I had no idea.
I came out of the PhD program, everything is according to theory and all that,
and all the players are good guys and, well, bollocks on that.
It turned out that if I could have gotten that client to cough up that kind of money,
which it didn't have, they would have gotten a better bond rating,
which means that they would have been able to negotiate a lower coupon rate
for the bonds that they issued.
As it was, they ended up getting a coup up.
They were basically rated as junk.
They paid a very high price for the bonds.
And that was that. That was the end.
Okay, now, behind the ratings, the coupon is a metric of how risky the bond was
at the time it was issued.
It's not a measure of the company's risk right now.
It's a measure of the risk that was assessed at the time of the investment bankers' negotiations with the company.
You, sir, come to my, I'm an investment banker,
you come to me and you say, I should like to borrow $100 million.
And I say, okay, we're going to get into a negotiation.
Because my backers, the ones who are going to put the money on the table,
put the blood into the game, want a fair shake.
We have to decide how risky you are, all the other terms of it,
and then we talk about the coupon from those risk factors that are affecting the bond.
It's the company's style. What do its financials look like?
What's its rating? How long is the bond?
Obviously, the longer a bond is, the higher the maturity premium is going to be.
So you've got the default risk coming in there, the default premium, the maturity premium.
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?
There's the illiquidity premium.
And what are the macro interest rates right now?
What's the risk-free rate running right now?
All of those are going to go into the negotiation and we'll come up with a coupon.
And that could even change, it's a preliminary, it can be set,
it's set really close to time of issuance and all that finally, but we get to put all that in there.
There are other provisions. Okay, is this a callable bond?
Is this a convertible bond? Putable bond?
All of those will go into the decision on the coupon.
Now, in this class, this is an intro class, and I gloss things a lot.
You don't have to worry about this, okay? Trust me on that.
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.
You as a relative newbie, as I was back in the day, you're going to just shut up and listen.
They're going to give you busy work to do, grunt work, calculations, type this up,
whoop this up on our spreadsheets and all this. But as time goes along,
you'll begin to know all of the ways that this happens, the negotiation, the parameters and all of that.
We have a course here, and I'm going to promote two courses here, okay?
One is, this one is in bonds, this is stocks, mutual funds.
It's our investments course, our EIF, our Educational Investment Fund.
You work in a team, and you're overseen by a trustee group of actual principles of brokerage houses in the state.
And you manage a real portfolio of here at Illinois State University.
And let me tell you, we really get excited about you not losing a lot of money.
There's even a better part of it too for the Department of Finance, Insurance and Law.
We get a commission from your success in the Educational Investment Fund.
It's not the easiest course. It used to be harder than it is now.
We backed off somewhat, but it's still, it is a hell of a course to take
if you want to get into the world of trading stocks, mutual funds, things like that.
And you get a lot of connections. Hell, you're working with these little demigods of brokerage community of Illinois
who are watching over your shoulder at any given time.
You learn how to collaborate, work in a group, and you find out the consequences of your decisions
in actual real money in that Educational Investment Fund.
We've been doing good for a few years here, really good.
And there's where you would come in.
Like I said, that's a course that you can take after you do 242 and 341.
It's a hell of a course.
Now we have another one, our fixed income fund, fixed income bonds.
And so there's one, if you want to get into the world of bonds,
and it doesn't hurt to take both of them.
That way you have the flexibility of moving from one desk to another.
You can start the fixed income desk at a brokerage house or something like that,
and then switch over to the equity, or you could do it the opposite way.
So those two courses are Educational Investment Fund course, EIF, and our fixed income course.
They get you into this world deeper.
Now, and the reason I'm bringing this up now is because we're doing fixed income.
Bonds are a fixed income instrument for the most part.
There are some that are a little bit not quite fixed, as in it's always the same.
But for the most part, bonds are going to deliver a cash flow, and no cash flow.
The coupon value, the coupon rate times the number of shares outstanding on a regular basis.
Now, your book starts out by saying it's once a year a coupon comes out.
In reality, it's two times a year.
And it's so easy on an Excel spreadsheet, you just change a one to a two or a two to a one.
But do know that.
And the difference between them is oftentimes pretty trivial.
But that's the next thing, is since a coupon is going to be twice a year,
and I'll switch between once and twice just to give you a feel for it.
Now, here's the thing that's odd, that has changed over my time as a professor.
Quotes on bonds used to be as easy to find as quotes on stock.
You just went to some place like Yahoo or something like that, and you get a bunch of bond quotes.
You can see the top gainers, the top losers on the bonds, just like the stocks.
You can't do that anymore.
It's like it's a dead field.
In order for me to find a quote, I would have to name a bond.
And bonds don't have those nice trading symbols like stocks do.
Every bond has this behemoth string of letters and numbers.
And so it's really not like it used to be.
There were a few places even a couple of years ago,
like the Wall Street Journal used to still show the gainers and the losers in bonds.
And they gave me some place I could show some bonds.
You can't do that anymore.
They're just not out there.
Why aren't they out there?
Mostly because they are not interesting.
Individual investors don't jump into bonds.
If they love bonds, they're just going to get a mutual fund or an ETF or an ETN of some kind
that will have bonds as its portfolio or will have a lot of bonds in the portfolio.
So individual investors, the institutional investors are the ones who are interested in bonds.
And so why open websites just aren't going to waste time
because the institutional investors are going to be using the fancy stuff to get their bond quotes.
However, I can get, if I know a company and I'm interested in a bond,
I can do that through, I think it's called C-bonds.
It's the place, and I'll show you where it is here in just a minute.
But the two things that we can calculate.
Well, let me stop the action here for just a minute and put some information on the board.
The face value, you'll hear me call it face, future value,
is always going to be $1,000 for our purposes.
Now, remember that bonds oftentimes quote on the hundred.
Excel is weird because in order to find a price, you use the thousand.
But in order to find the yield, you have to quote on the hundred.
It drives me crazy sometimes.
So you'll hear me go back and forth between these.
Now, these, the thousand and the hundred, those are called par.
Par on the hundred or this par value.
And we use the term par.
We don't say par value.
We just say par.
Now, the next one, I don't know.
Yes, it's used, but Excel gets all excited about it.
So I'll tell you the settlement.
Or settlement.
Settlement is the actual day that you obtain ownership of the security of the bond.
That's settlement.
So I set up Excel so that it automatically makes settlement the day that you open the Excel sheet to do a calculation.
In other words, as of today.
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.
So you might have to change the settlement date.
But I mean, it's like normally we assume that we get it today.
And that's why I set up the Excel sheet so that you can see it that way.
The settlement date.
Okay, now it gets into the other parts of it.
Okay.
The time of maturity.
Or the date.
You'll hear me use the term maturity.
The date of maturity or the time of maturity.
You'll just hear me say maturity.
Maturity on, maturity 2032.
That's all I'll say about it.
I'll just use the term maturity.
Getting our language down is kind of one of the hidden parts of getting you into finance as your career.
Not just as your major, but as your career.
Just getting a little bit of our lingo down.
You don't want to go crazy and say things that sound silly.
But just use calmly our shortened versions of things.
That's the time of maturity.
Now, another one is term.
Term is how long the instrument has until maturity.
So it's 2024 and I mentioned maturity at 2032.
So the term is eight years.
The term is eight years.
Now, interestingly enough, the settlement date really doesn't mean a whole lot if you're a secondary market purchaser of bonds.
If you have a bond in the secondary market, the settlement date doesn't mean anything to you.
You didn't do anything on that date.
Someone else did and now you're just buying a bond from someone else.
The term does matter.
And then I want to put a word in here.
There's actually two words, but one of them really doesn't mean a whole lot.
I'll put it in parentheses.
Worst.
Now, I don't think this one is even more.
Worst.
That is the worst case scenario for when the bond matures.
You see, a bond in 2032 might have a call provision that starts in 2028 or 2026.
So worst, I could use the term for my calculations, but I might also use the worst, 2026.
So in that case, I would not have a, if it were 2028, there's a call that could be executed in 2028.
Okay, the best is the term 12 years.
Is that right?
No, eight years. I'm sorry, eight years.
But the worst would, you would not put the term in to the proper place in Excel.
You would put in the, in that case, four.
You wouldn't put the best, the term, eight.
You would put in the worst.
In a worst case scenario, the term is reduced, the number is reduced to four from eight.
So you'll see that term worst sometimes.
Now, there are other reasons besides a call provision, the bond could be executed early.
But call is most likely, is a likely case.
Now, the price and the yield.
We trade on prices.
Now the price should not deviate far from a thousand.
Because at the end, if you hold the bond to maturity, you're going to get a thousand dollars.
You're going to get the payoff of the bond.
So anywhere along the line, the bond is not going to go very far from that in a normal situation.
Only if interest rates did something really wild or the company started going in toward bankruptcy.
In that case, then the price could whip around somewhere.
But normally the price is going to be somewhere around a thousand.
Now if it's above a thousand, we sell premium.
If it's below a thousand, we say discount.
Now I'm going to come back here and say something about price in a minute.
Let me get the other term down. The yield.
The price reflects the yield mathematically.
The price affects the yield, one for one mathematically by a formula.
Think about it this way.
The yield is what the market wants the bonds coupon to be.
But of course, the coupon can't be that.
The yield represents the current interest rate that should be paid by the coupon even though the coupon can't pay it.
So if I said that a bond, it's an 8% bond and the yield is 9%.
The market's saying that that coupon sucks on the current day or whatever.
Because a bond of that risk should be paying 9%.
This bond is paying only 8%, so that's going to cause the price to drop.
Investors are going to sell the bond, driving the price down until the yield goes up to 9%.
And I'll keep saying this over and over again.
It's not obvious to most people.
If it's that obvious to you, then you probably don't get invited to parties very much.
Okay, now take the other.
The bond has a coupon of 8%.
Let's say that interest rates have fallen.
This bond should be paying only 7% based upon its risk in the current macroeconomic and company situation.
So this bond is paying a lot more than it should based on its risk.
And so investors are going to go cuckoo bananas for this bond.
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%.
In other words, you'll be paying a lot more because this is a candy bond.
Because it's paying more than it should.
It's paying 8%.
And right now, it should be paying only 7%.
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.
So now that interest rates are beginning to ease back macroeconomically, well, these bonds are actually paying their kind of candy.
So you're seeing investors buy these bonds because they're paying coupons that are unusually high.
Which means, of course, that they are buying them.
That's driving the price up and the yield down on these bonds.
Now let me go back here to price.
There are actually two prices.
The one that you would see quoted is the clean price.
But there's also a dirty price.
The dirty is what you'll pay, is what you'll actually pay.
Look at it this way.
Let's say we had a bond.
And it paid 8%, which means that on the thousand, you were getting a check for $80 a year.
$80 a year, okay?
And let's just make it one period.
Okay.
Here was the last coupon.
Now here's the next coupon one year later.
You got $80.
And now, let's say in three months, you sell that bond.
So from here on, it belongs to someone else.
That someone else gets the next coupon.
But a fourth of that coupon doesn't belong to him.
It belongs to you because you had that bond for three of the 12 months.
So you, the dirty price, is going to include one fourth of $80.
So when you buy the bond here, when someone else buys the bond there, they not only pay the price,
they also have to pay $20 more to compensate you because you won't get the coupon of which you deserved a fourth.
The new buyer will get it.
So the clean price would be $1,015.
The dirty price would be the $1,015 plus $20.
That would be the dirty price.
If the clean price is $1,015 for the bond, that's a quote on the bond.
What you'll see on your account, if I bought the bond at three months into the coupon cycle,
what I'd buy, I'd see $1,015 plus $20, so I would actually pay $1,035.
And whoever sold me the bond would get the $1,015 plus the $20.
So be careful on a clean price.
You see quotes are always clean because no one knows when the bond is going to sell,
what day.
So as soon as the bond sells, then suddenly the dirty premium is going to be kicked into it at that point.
So in other words, if someone had sold that bond at six months, then he'd get half of the next coupon,
so that would be tacked on to the clean price that whoever bought the bond paid for it.
So that is always something you want to keep in mind if you actually buy bonds,
is the quote isn't going to be what you actually have taken out of your account.
If you buy a bond, you will pay what the quote was, but you will also pay the dirty on it too,
the dirty piece on it too.
Now, and we'll go back to these.
One last pointer.
Bonds are just like stocks, there's a bid and an ask.
And something else that isn't really there with stocks anymore.
You remember I used that term round lot for you, on you, a round lot of the 100 shares?
Well, that really doesn't mean anything with stocks much anymore, but it actually does with bonds.
An odd lot might have a different quote from a round lot.
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.
So just to get this underway here, just to show you before we whip out the old Excel sheets and crank on this.
Okay, here's meta.
Oh, look at that.
Full lot versus odd lot.
They're using full lot, I always say round lot, but you know, there you go, old fashioned.
Now, if you see something interesting about meta, we'll look at the full lot, a round lot there.
Notice there's a bid and an ask. And notice this is the bid.
That is what makes that yield.
There is the ask. That is what makes that yield.
So I know the price, and I know the term to maturity. I can get the yield.
If I know the yield, I could actually back up and get the price, but you know, that's not really how it works.
Everything is traded in price.
So the prices that are being argued and negotiated between buyers and sellers of bonds and all that, that's what you see.
But the yield is what really matters. That is what is implied by the price.
And this is a hell of a thing.
Notice that lower price makes a higher yield on the bid.
The higher price on the ask makes for a lower yield on the ask.
That's a price and yield relationship.
That is actually, that's kind of a spread there on that.
But, well, there you go. But notice that it's the mark.
And I can't remember what I told you. The word mark means the middle point between a bid and an ask.
And that's the mark. If I look at the mark here, it's a little below par.
And notice these are quotes. They're not prices, they're quotes. You see them?
Those are on the hundreds.
And notice that the bid is a little discount. The ask is a little premium.
The mark, that average, is a little, a tiny bit of a discount between them.
You do have to be cautious about this because all the quotation services, they usually would just give you the mark.
And sometimes that mark can be the midpoint between a pretty wide thing here.
In this case, you notice that that price difference between the bid and the ask, that has a rather significant,
20-some basis points on the yield between the bid and the ask. So if I were to buy this bond,
I would pay $1,002.54.
If I were to sell one of these meta bonds, I would receive $995.
You follow it? This is kind of bringing back some of the stuff. And don't worry, we just keep doing this.
I kind of want you to come out of this course very comfortable with this.
And I don't expect you to be comfortable with it until we've beaten it up all semester.
So don't sweat it if this is still looking a little bit Greek to you.
Notice that the odd lot, you see how the, oh, damn.
The odd lot, you notice that that bid price is lower and the ask price is lower.
So buying odd lots. Well, I'd like to buy 12 of these bonds.
You're going to get smacked for that compared to if you buy 100 of them.
That's not, it used to be true in stocks. Odd lots, you always bought in hundreds.
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.
That's meta. But notice that meta, this is a 4.6% bond.
It's due on the 15th of May, 2028.
Now, for the purposes of this course, I'm not going to, you can quibble about those differences between the settlement
and the date of maturity because that actually does affect the price a little bit and therefore the yield.
But for my purposes in this course, we would just say the term of this bond is four years.
Well, technically it's four years and two months and three days.
Quit that. We're not going to do it that fine. We're just going to do years.
Okay. So for my purposes, you would say the term of this bond is four.
Okay, see that one? Okay, now I pulled up a couple more here for us.
Tesla.
Notice that they don't even talk about odd lots with Tesla.
Good luck with that if you want to try to find and do an odd lot.
But there you go.
It's a 5.3% coupon.
That means that whenever this bond was issued, its risk was commensurate with 5.3% interest rate.
Now, this bond has a very short time to maturity and you're going to see that that affects the price of a bond.
As bonds get closer to maturity, they will, if everything else, if everything's normal,
they'll get closer and closer to par.
This bond is only, well, it's less, no, it's a little more than a year.
It's a little more than a year, two years, I'm sorry. No, a little more than one year.
So this bond will start moving, it's getting closer and closer to par value.
You're saying, oh, wait a minute, fat boy, that thing looks like it's at a premium.
That's, look at the yield.
This is what the market says the bond should be paying.
It should be paying 4.534%.
It's paying a lot more than that. It's paying 5.3%.
That means it is selling at a premium.
Investors are going to buy this bond because it's paying more than it should.
The coupon is higher than it should be.
So if you buy on the bond, that will drive the premium, the price up to a premium to par on it.
Now you notice that the bid and the ask are identical on this.
That probably means that there is a lot of trading going on in the bond.
A lot going on in the bond.
The bid and ask tighten, the spread tightens, the more active the market is for the bond.
In this case, there must be a lot going on with that bond right now.
Now, I meant to keep up that other one and I didn't.
I'm going to keep this one up here.
The reason being that we should be able to go into the Excel spreadsheet
and put in that quote and get that yield.
Or put in that yield and get that quote in the Excel spreadsheet.
You will see that we don't quite get it because there is a little bit of haziness.
One thing is that it's not exactly a term of one year.
That will make our calculation off a little bit.
You can do it in my spreadsheet with exactly the year and the decimal of the year.
But, I'm not going to do that.
But, for the most part, we should be able to put into the Excel spreadsheet the bid, maybe the mark.
Put in the mark maybe.
That's easy enough. It's 102.68.
And we should get that yield spit out.
It will be perfect, like I said, because you'd have to put in the year and the part of the year into it.
Now, remember also that these are clean quotes. These are not dirties.
So now let's go over here and look at Netflix.
Netflix is paying 5.375%.
Now, of course, this was money that was borrowed when interest rates were higher.
Overall, interest rates have fallen.
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.
Now, this bond, it has a term of five years.
Whoa, that's quite a spread there.
Okay, now this is a full lot. This is a round lot.
101.009 on the bid, 101.564 on the ask.
And as you can see, it's effect.
The higher price of the ask makes for a lower percentage on the yield.
So let's go back here to Tesla.
And now let me introduce you to your spreadsheet that will save your bacon files.
In your files, you get your spreadsheets.
Now, this is called the bond calculations enhanced.
I've made it about as easy as I can for you to do it here instead of on a financial.
You can do these on TI-83. They're not that hard to do on there. I won't show you.
Doing these with tables, good God, that's way too much like work.
So we're going to pull up this, download it.
Okay, enable editing.
Now, as you can see, it works like this.
I've got a couple of stories so we can put some numbers in here.
But this will calculate a bond price if you know the yield.
This will calculate a yield if you know a price.
Now, this one, everything is on dollars, thousand and you get out thousands.
For some reason, Excel wants you to do the yields on the hundreds.
Don't ask me why, but that's what they want.
Excel is Microsoft and Microsoft is Bill Gates, so whatever Bill Gates wants, the universe gives him.
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.
I would ask you on an exam or a quiz just for two decimal places,
but I give it because oftentimes you'll see these at three decimal places, especially coupons.
I saw a CVS bond, the coupon was like 6.3255.
They can even go out four decimal places, but there's that.
Okay, so in this one, I have JCG 6.225%, 2035.
Okay, so that means that the coupon, that's what's right after the name of the bond.
Again, I'm using stock ticker symbols because the names of bonds are just ridiculous.
6.225 means that's the coupon, so that's what I put in the annual coupon.
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.
And the coupons per year, I put it in two.
Your homework in Cengage starts with one and then they go to two, but with Excel, you know, it's not a big thing.
And out snorts your price that easy.
And as you can see, this is selling at a premium to par.
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.
So, of course, investors are going to drive the prices that bond up.
This is a classic question on a quiz and an exam.
If the coupon is above the yield, then the price, then the bond will sell at a premium to par.
If the coupon is above the yield, premium.
If the yield is above the coupon, discount.
What would happen if I said that this yield to maturity was actually 6.5%?
Well, now, I meant 6.5%, well, 6.5%.
Well, now, see how it sells at a discount to par?
You can just play it back and forth until you get used to it.
Put in yield above coupon, yield below coupon, and spank me Jesus.
That's all there is to it.
Don't make this as hard as it used to be.
I don't make you walk through five feet of snow to get to campus.
We plow the roads nowadays.
This is one of the benefits of the 21st century, is that these are a lot quicker to do.
That means that you can have more time just to feel around and see what changing different parameters does.
I want you to know something.
Watch this.
I'm going to leave it with the coupon at 6.225% and the yield to maturity at 6.50%.
Now, I want you to watch the price as we get closer to the, as the term approaches zero.
Let's say now that we're only eight years from the maturity.
Watch what happens to the price.
Let's say we're only five years.
Spank me Jesus, look.
It's approaching par because there's less volatility possible, less risk.
So let's get it down to two years.
Whoa.
To one year.
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.
Let's look at six months.
Wow.
Well, let's see.
I don't know if it will do this or not.
I actually don't.
What happens if you write on the payment date, the end of the bond?
Well, I'll be darned.
Of course it's going to be worth a thousand because you're getting a thousand dollars that day.
You see it?
Not complicated.
Now let's go over here to yield.
Now, as I told you, I've set up this one so that settlement is on the day.
Okay.
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.
It makes it easier.
And then the term, I put the maturity date.
You have to put in the term.
And what it will do is put in the maturity date for you.
So in other words, when you put in 12 years, it takes 12 years from this date and tax the maturity date on.
Don't mess with either of these.
Just put in the term.
It has already put in today as a settlement date.
And when you put in the term, it will put in that many years after that date.
So watch what would happen if I put in 16 years.
Watch the maturity.
See it?
It calculates it for you.
So you don't have to worry about that.
Excel works hard so we don't have to.
Now, let's, coupon, okay, now, redemption.
I put in the hundred there.
For God's sake.
You have to put in the price, equals the price divided by 10, unless you're given a quote.
So if I said, in this example, I said it's selling for $942.35.
So you have to say equals $942.35 divided by 10.
So now let's do this one.
8.2% coupon, do 2035.
So that would be 11 years from now.
And redemption, that's all I have.
Let's say that we get one coupon a year.
So there's your yield line.
You notice that this bond was selling at a discount to par.
Do you see 942.25?
It's selling at a discount to par.
That means that the yield, the market wants more than the coupon is paying.
And they'll drive the price down until it meets that.
Watch this.
Suppose that I put the price at $1022.
Watch yield to maturity go below the coupon.
What?
I'm just testing you on that. I'll have to fix that.
Oh, oh, equals 1000.
Practice what I preach, fat boy.
I was just testing you there.
7.89%.
See how now that it's selling at a premium to par,
$942.25, rather, it's selling at $1022.
That means that the yield will be below the coupon.
Fix that in that little thing right there.
There you go.
And that's all there is to it to this.
This used to take up a lecture and a half just going through the math,
especially when all we had were formulas.
Because the price isn't hard to find mathematically.
The yield is a bear.
Because you have to work back and forth until you get the price
to be close to where it will be matched by the yield.
Okay. But there you go.
That is how you do the Excel version of this.
Now, let me go back here.
Let me try Tesla.
The quote is 102.68.
So let's try, and that one, what?
Has one year left, a little more than a year.
We'll do two coupons to make it real.
One year, and we'll make the price 102.68.
Now, before I do this, let's see what,
and I warn you, we'll be right because of that slight more than a year.
4.534.
Whoa, that one is really off.
Oh, the coupon.
De, de, de.
5.3.
Whoa, that's even lower. Why?
There might be something unusual about that bond.
That's a real whack difference.
102.68, one year, two payments a year.
Yeah, that is really off on Tesla.
That's really off.
102.68, yeah.
Okay, okay.
That one didn't come through very clean.
Let me try Netflix.
What's the mark on that?
Let me pull up a calculator here.
101.009 plus 101.564 equals, divided by two,
so the mark is 101.29.
Let me just do 101.29 on it.
101.29, 101.29. How many years does it have left?
Five years, five points, five years actually.
Five years.
And what's the coupon on it?
Whoops. 5.375.
I'll bet this one's going to be whack too.
That's not bad. That's not bad.
And that's, I don't know what's going on with that Tesla bond,
but yeah, this is more what I would expect.
Let me try something here.
Let me put in 5.5 years, March to August.
Didn't really change it much at all.
Yeah, that's not bad.
Like I said, the Excel will not reflect perfectly the market
unless I do some other fancy stuff.
But anyway, that's a little better.
Actually, that is the mark.
That might be very close to the mark yield.
See, these are the bid and ask yields.
Let me do one more, just out of curiosity.
Try another one.
Let me go back here.
I'm just curious about something, Tesla.
That was, the maturity on that one was August 18th of 2017.
So it originally was an eight-year note.
This is a note, not even a bond.
It has 1.408 years left.
1.408 years left.
There's the quote, issue coupon fixed semi-annually.
This is a debenture.
Do you see it's a debenture?
It's unsecured.
Remember, it's a mortgage bond or a collateralized bond,
or it's a debenture.
A debenture is unsecured.
There's its actual name.
It's in, they borrowed 100,000, 1.8 billion?
Holy sh...
You have to buy 2,000 of them to join,
and you buy in 1,000 increments.
High yield, which means that's a fancy term for a junk bond.
It's not investment grade.
That's what that means.
Actually, C-bond is not bad if you know what bond you want.
C-bond doesn't suck too much.
Let me try another one.
Is there any bond that sounds interesting right now?
Oh, here's one.
NVDA.
That's an international bond.
2.85% coupon.
Doesn't even have any quotations on it.
Oh, it hasn't been issued yet.
Oh.
That's interesting.
Well, let me try one more here.
Anyone got a bond?
I'm out of thinking right now.
What would be a bond?
Come on.
Someone help me out here.
What the hell?
RIVM.
Do they even have bonds?
There's Rivian.
That's a note.
It's got five years left.
Oh, look at that.
Just almost exactly five years left to maturity remaining the term is.
4.625.
That was a $1.5 billion bond.
And it's not even giving anything.
This is one that's still out there.
Oh, I see.
They won't let me unless I buy the...
I get it.
You have to buy a subscription to get that one.
La dee dah.
But anyway, you see what I mean.
This is your bacon saver for this homework for problems on exam.
Now, as far as I would be concerned on an exam, as far as calculations go,
I would not go any further than finding a price given a yield
or finding a yield given a price.
I might ask you for some other qualitative stuff about bonds
or the relationship between bond and yield, coupon and yield,
premium discount and all that.
But if you can master what I've shown you here,
you've got what you need to be a darn fine bond trader
and live the exciting exotic life of fixed income securities.
That's all I have for you today.
I thank you.