In finance, securities trade either on exchanges or in the over-the-counter (OTC) markets. Corporate bonds trade almost exclusively in the OTC markets, meaning they generally don’t trade on exchanges.
An exchange is a centralized marketplace where investors trade securities, such as the New York Stock Exchange (NYSE). Only a small number of corporate bonds trade on the NYSE. If a transaction occurs there, it’s an exchange trade (not an OTC trade).
The OTC market is an interconnected dealer market with no single physical location.
Some corporate bond investors try to buy at lower prices and sell at higher prices (although many bond investors buy and hold to maturity). While bond prices are heavily influenced by interest rates, a corporate bond’s market price is ultimately determined by supply and demand.
Finance professionals often use shorthand when discussing securities. Markets move quickly, so quotes are designed to communicate information efficiently. A quote states the current market value.
Some quote systems are straightforward, like common stock. If you asked for a stock quote, you might hear:
ABC stock is trading at $50 (per share)
Bond quotes take more getting used to. A bond quote might sound like:
The ABC corporate bond is trading at 95
This means the bond is trading at $955. Notice how much faster it is to say:
Ninety five and a half (95 )
vs.
Nine hundred fifty-five dollars ($955)
Corporate bonds are quoted in ths (eighths). A typical corporate bond quote looks like a large number followed by a fraction (for example, 95 ). The fraction must be in eighths or reduced from eighths (for example, reduces to ). If the fraction isn’t in eighths (or reduced from eighths), it isn’t a valid corporate bond quote.
How do you convert a fractional corporate bond quote into a dollar price? Use Achievable’s fraction-boot-scoot method.
A corporate bond is quoted at 102 . What is its price?
Step 1: calculate the fraction
Step 2: boot the decimal back to the big number
Step 3: scoot the decimal once over to the right
Try one on your own:
A bond is quoted at 98 . What is its price?
Answer = $987.50
Step 1: calculate the fraction
Step 2: boot the decimal back to the big number
Step 3: scoot the decimal once over to the right
Both quotes above are in eighths (or reduced from eighths). Corporate bond quotes are percentage of par quotes, meaning they’re stated as a percentage of the bond’s par value. Since par is typically $1,000, a bond quoted at 98 is trading at 98% of $1,000, or $980.
If bonds only traded in $10 increments, fractions wouldn’t be needed. Fractions are used when a bond trades between those $10 increments. For example, a price of $987.50 corresponds to a quote of 98 .
Percentage of par quotes use bond points.
So, if a bond is worth 98 bond points, it’s worth $980 (98 x $10). You may hear these described as percentage of par quotes or bond point quotes, but both refer to the same market price.
Bond quotes may also include the letter M. For example:
10M bond trading at 95 .
Here, M refers to par value in $1,000 units (M is the Roman numeral for 1,000). So this quote means:
Ten $1,000 par bonds trading for $955 each, or
$10,000 par value trading for $9,550
To keep it simple, treat the M as a size indicator. Buying a 10M bond is the same as buying ten $1,000 par bonds.
A full corporate bond quote can include a few additional pieces of information. For example:
5M 10s ABC Debenture M’40 @ 95
You should already be comfortable with these parts:
Now add the two new elements:
You may also see a zero coupon bond quote. Instead of a number followed by s, it may appear as:
5M Zr ABC Debenture M’40 @ 95
Sign up for free to take 11 quiz questions on this topic