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Could someone help me understand bond information?

Personal Finance & Money Asked by user3457834 on October 16, 2020

I’m currently looking at this website for information on Government of Canada bonds. I was just wondering if anyone could tell me when the coupon payments are made (is there only one at maturity?) and what the yield tells us. For instance, if you look at the third bond in the list it has a coupon of 11.25, but then it has a yield of 0.95. Does this mean that I will receive 11.25% at maturity? Or 0.95%?

2 Answers

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It seems to me the coupon is semiannual. You pay $105.10, and get a coupon of $5.62 in June along with your $100. So, you 'lost' $5.10, for a net .52, or .95%.

Correct answer by JTP - Apologise to Monica on October 16, 2020

For a $100 semi-annual bond with a coupon rate of 11.250%, each coupon you receive will be $5.625 5.625% of $100, or $5.625

To find out why, let's analyze the cash flows of this bond:

Principal: Bonds are always quoted assuming denominations of $100, so analysis is made easier if we pretend you are buying one bond with a face value of $100. As you know, this means you will receive a full $100 at maturity.

Coupon Frequency: Government of Canada bonds and many other government bonds around the world are structured using semi-annual coupon payments, as per US Treasury Bonds. Coupon payments will be paid out on maturity, and at the beginning of every six-month period leading up to maturity (In the case of the third bond there are two coupon payments, at 12/01/2014 and 06/01/2015. If you buy the bond when the markets open on Monday 12/01/2014, then the next coupon payment will have just been paid out to the seller of the bond, and you will only have the remaining coupon at maturity).

Coupon Amount: Coupon rates are quoted per-year, so for a bond with semi-annual coupons each payment you receive will be at half the coupon rate. For a $100 semi-annual bond with a coupon rate of 11.250%, each coupon you receive will be $5.625 5.625% of $100, or $5.625.

Accrued Interest: If you buy a bond on the market some time in the middle of its six-month period (as opposed to right at the beginning), you must also pay accrued interest to the owner. This amount is equal to the next coupon payment multiplied by the percentage of the period which has already gone by. But assuming that you buy the bond when the markets open on Monday, Dec 1st, you will be buying at the beginning of a six-month period, so accrued interest will not be required.

Cash Flow Stream: If you buy Bond 3 on Monday 12/01/2014, your will receive a single payment of $105.625 on 06/01/2015.

Price and Yield: Given that you are paying $105.100 for the bond, we can calculate the rate of return on your investment. The numbers will be slightly different since the table you provided is from Friday 28/11/2014 and we are assuming you will buy the bond on Monday 01/12/2014.

r (semi-annual) = ($105.625 / $105.100) - 1 = 0.4995%

r (annual, nominal) = 2 * r (semi-annual) = 0.9990%

The yields quoted in bond price tables are simply the nominal annual interest rates that you would get if you bought a bond at the market price.

We can also easily convert from yields to prices. Assume that the yield stays at 0.95% when the market opens on Monday.

r (semi-annual) = 0.950% / 2 = 0.475%

P = $105.625 / (1 + 0.475%) = $105.126

Answered by Boston Walker on October 16, 2020

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