Understanding bond price and interest

Discussion in 'Fixed Income' started by pietruzzo, Oct 14, 2020.

  1. Hello everyone,

    I have been going mental for the past few days trying to learn the basics of bond trading, and despite having understood the coupon / interests formula, I am getting confused with the bond bid/ask price.

    For instance lets take following bond as example:

    Face value: $1000
    Coupon: 10
    Maturity: 5 years (it is actually a bit less but lets just assume it is 5 years to simplify things)
    [​IMG]

    If I were to buy the bond right now and hold it for exactly 5 years, the following formula tells me this is what I will be paying for the bond today: 1000 / (1.10)x^y5 = $620.92.

    This means that by the end of the 5 years holding term, the issuer of the bond will have repaid a total of $1000, leaving me with $309 of profit. Am I on the right track?

    Now, if my understanding is correct, what does the Bid/Ask exactly indicate and how does it affect the cost of the bond and the total profit?

    I do apologise if these questions may seem too lame but I have always been terrible with mathematics and logic.

    Thanks
     
  2. No love for bonds anyone?
     
  3. xandman

    xandman

    Your quote shows an ask multiplier of 106.182. So, a $1000 bond will cost you $1061.82 to buy at the ask.

    The bid/ask implies a yield-to-maturity(YTM) which is higher at the bid and lower at the ask. The lower you buy, the higher YTM that you get to lock in. You can set TWS to display bid-yield and ask-yield.

    By knowing the YTM, you can work the following example:


    upload_2020-10-19_16-4-1.png
     
    Last edited: Oct 19, 2020 at 5:34 PM
    pietruzzo likes this.