How Bonds Are Quoted
How Bonds Are Quoted
If the columns of numbers, letters, and abbreviations associated with bonds and bond quotes have ever mystified you, now is your chance to understand them better.
Things To Know
- Whether it trades at more than par or less than par, a bond’s price will be stated as a percentage of its par value.
- Most purchasers of bonds don’t buy them new or hold them until maturity.
Unlike other types of securities, bonds typically have a definite life span. That is, they exist for a finite period of time, after which they are bought back by the issuer at maturity. However, most purchasers of bonds don’t buy them new or hold them until maturity. Instead, they often purchase them after they’ve been issued and sell them to someone else long before maturity. This active trading, combined with fluctuating interest rates, causes the price of bonds to go up and down.
How bond prices work
When issued, most bonds are sold at par, or face value, which is usually $1,000. There are exceptions to this rule, as you will see. Someone purchasing a new bond with a par value of $1,000 would pay exactly that amount (plus any applicable fees or commissions). However, someone purchasing that same bond later in the secondary market may pay more or less than $1,000, depending on current interest rates and other factors. Whether it trades at more than par (premium) or less than par (discount), the bond’s price will be stated as a percentage of its par value. For example, a bond quoted at "90" is selling at 90 percent of its par value, or $900.
Bid and asked prices
When bond prices are listed in the financial press, they may be quoted as a bid and asked price. The bid price is the highest price a dealer is willing to pay for the bond, and the highest price at which you can sell. The ask price is the lowest price that a dealer is willing to sell the bond for, and the lowest price at which you can buy. The actual price an investor pays is usually negotiated between the two.
Once a bond begins trading in the secondary market, it may trade for more or less than its par value. Either way, its selling price is typically quoted as a percentage of par.
