Bond Markets
by MaestriCorporate bonds are traded primarily in the over-the-counter market. Most bonds are owned by and traded among the large financial institutions (for example, life insurance companies, mutual funds, and pension funds, all of which deal in very large blocks of securities), and it is relatively easy for the over-the-counter bond dealers to arrange the transfer of large blocks of bonds among the relatively few holders of the bonds. It would be much more difficult to conduct similar operations in the stock market, with its literally millions of large and small stockholders, so a higher percentage of stock trades occur on the exchanges.
Information on bond trades in the over-the-counter market is not published, but a representative group of bonds is listed and traded on the bond division of the NYSE and is reported on the bond market page of The Wall Street Journal. Bond data are also available on the Internet, at sites such as http://www.bondsonline. Figure 4-6 reports data for selected bonds of BellSouth Corporation. Note that BellSouth actually had
more than ten bond issues outstanding, but Figure 4-6 reports data for only ten bonds. The bonds of BellSouth and other companies can have various denominations, but for convenience we generally think of each bond as having a par value of $1,000—this is how much per bond the company borrowed and how much it must someday repay.
However, since other denominations are possible, for trading and reporting purposes bonds are quoted as percentages of par. Looking at the fifth bond listed in the data in Figure 4-6, we see that the bond is of the series that pays a 7 percent coupon, or 0.07($1,000) $70.00 of interest per year. The BellSouth bonds, and most others, pay interest semiannually, so all rates are nominal, not EAR rates. This bond matures and
must be repaid on October 1, 2025; it is not shown in the figure, but this bond was issued in 1995, so it had a 30-year original maturity. The price shown in the last column is expressed as a percentage of par, 106.00 percent, which translates to $1,060.00. This bond has a yield to maturity of 6.501 percent. The bond is not callable, but several others in Figure 4-6 are callable. Note that the eighth bond in Figure 4-6 has a yield to call of only 3.523 percent compared with its yield to maturity of 7.270 percent, indicating that investors expect BellSouth to call the bond prior to maturity.
Taken From : Five-Minute MBA – Corporate Finance
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