IBM BOND PRICING

IBMBOND PRICING

InstitutionAffiliated:

Dateof submission:

Thebond details are as follows

Issuer

Symbol

Coupon

Maturity

Last

Trade

Price

Last Trade

Time

Change

$

Bid

Price

Bid

Size

Offer

Price

Offer

Size

Spread

Issue

Type

IBM

Corp.

7.625%

NTS 10/15/18

IBM18

7.625%

10/15/18

121.15

11/20/2014

14:40:11

121.56

104

122.10

28

5.8

Corporate

Bond

Definitionof terminologies

Couponrate is the yield or interest gain of the bond issued. Maturity dateis the date at which the bond principal is paid back to investors andinterest payments stops. Last trade price is the prevailing marketprice the last time sales were done. A bid price is the value atwhich a buyer is willing to purchase the bond at while bid size isthe amount buyer is willing to purchase. Offer price is the price inwhich the seller is expecting to sell a bond while offer size isamount seller is willing to sell. The spread is the differencebetween offer price and bid price, and it shows the market volatilityor liquidity.

Thelast price of the bond was $121.15. The annual coupon interestpayments are obtained through the multiplication of the coupon rateand the par value. We shall assume par value equals offer price as wehave no information about the par value. It will be 7.625% * 121.10 =$9.230.

Currentyield

=Annualinterest payment/Current Bond price

=7.625/122.15

=0.060

=6.0%

YTMusing last bond price

YTM= (C + ((F-P)/N)/ ((F+P)/2)

=(9.23 + ((122.10-122.15)/4)/ ((122.10+122.15)/2)

=(9.23 + -0.0125)/ 244.25/2

=9.2175/122.125

=0.0755 = 7.55%

YTMand current yield major limitation is that investors will hold thebonds to their maturity and that the reinvestment of the coupon ratepayments of the bond will be at the yield-to-maturity rate.

Effectson yield on a bond

Bondsare callable

Yieldof callable bonds is usually higher as it serves as an incentive dueto the high risk involved in purchasing callable bonds. Risk is suchthat the issuer will call the bond when the prevailing interest ratesdecline.

Subordinationof the bond to the existing bond issue

Theiryields decline as investors get the perspective of being lesssuperior to the other bonds.

Bondsrating is better or worse

Expectedyield will increase if the bonds are rated better and decline ifrated worse due to investor perspective and confidence in the bonddue to information passed.

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