The market & quotes

Corporate bond market

In the world of finance, securities trade either on exchanges or in the over-the-counter (OTC) markets. Corporate bonds almost exclusively trade in the OTC markets, which means they do not trade on exchanges. Exchanges are centralized locations where investors trade securities, like the New York Stock Exchange (NYSE). Only a small number of corporate bonds trade on the NYSE. If a transaction occurred there, it would be considered an exchange trade, not an OTC trade. The OTC market is an interconnected market without a physical location.

Some corporate bond investors aim to buy at low prices and sell at higher prices in the market (although many bond investors simply buy and hold to maturity). While market price fluctuations largely depend on interest rates, the demand for a corporate bond ultimately decides its market price.

Corporate bond quotes

Finance professionals sometimes speak what feels like a foreign language when discussing securities. Due to the fast-paced nature of the markets, there’s an incentive to convey information as fast as possible. When a quote is given on a security, it states the current market value. Some quote systems are simple, like common stock. If you called a financial representative asking for a quote, they would probably say something like:

ABC stock is trading at $50 (per share)

Bond quotes are more complex and difficult to understand initially. A bond quote may sound something like:

The ABC corporate bond is trading at 95 $\frac{\text{1}}{\text{2}}$

This translates to “the ABC corporate bond is trading at $955.” Think about it - which can you say faster?

Ninety five and a half (95 $\frac{\text{1}}{\text{2}}$)

vs.

Nine hundred fifty-five dollars ($955)

Corporate bonds are quoted in $\frac{\text{1}}{\text{8}}$ths (eighths). When asked to identify a corporate bond quote, you should look for a big number followed by a fraction (like 95 $\frac{\text{1}}{\text{2}}$). The fraction following the big number should always be in eighths or reduced from an eighth (for example, $\frac{\text{4}}{\text{8}}$ would be reduced to $\frac{\text{1}}{\text{2}}$). It isn’t a valid corporate bond quote if the fraction isn’t in eighths or reduced.

How do you easily turn a fractional corporate bond quote into a price? By using Achievable’s “fraction-boot-scoot” method. Let’s walk through an example:

A corporate bond is quoted at 102 $\frac{\text{1}}{\text{8}}$. What is its price?

Step 1: calculate the fraction

• $\frac{\text{1}}{\text{8}}$ = 0.125

Step 2: boot the decimal back to the big number

• 102 + 0.125 = 102.125

Step 3: scoot the decimal once over to the right

• $1,021.25

Think you can do it on your own? Give it a try!

A bond is quoted at 98 $\frac{\text{3}}{\text{4}}$. What is its price?

As you can see, both quotes listed above are in eighths and reduced to the lowest possible fraction. Corporate bonds quotes are percentage of par quotes, which means they relate to their par value. A bond quoted at 98 is trading at 98% of par ($1,000), which is $980.

If bonds only traded in $10 denominations, fractions would be unnecessary. However, the market trades bonds at various prices. Fractions are utilized when a bond does not trade in $10 increments. Our example above is trading at $987.50, which translates to a quote of 98 $\frac{\text{3}}{\text{4}}$.

Percentage of par quotes utilize bond points.

If a bond is worth 98 bond points, it’s worth $980 (98 x $10). There are various ways to refer to these quotes, but it always works the same way. Whether referred to as a percentage of par quote or a bond point quote, both refer to the bond’s market price.

Bond quotes may also contain the letter’ M.’ For example:

10M bond trading at 95 $\frac{\text{1}}{\text{2}}$.

The ‘M’ refers to the overall par value of the bond being quoted, specifically in $1,000 units (M is the Roman numeral for 1,000). Therefore, the bond quote above translates to:

• Ten $1,000 par bonds trading for $955 each, or

• $10,000 par value bond trading for $9,550

To keep it as simple as possible with ‘M,’ pretend it’s not there. Buying a 10M bond is no different than buying ten $1,000 par bonds. It’s just another part of bond language that attempts to convey information efficiently.

There are a few other elements of a corporate bond quote to be aware of. Here’s an example of a full quote:

5M 10s ABC Debenture M’40 @ 95 $\frac{\text{1}}{\text{2}}$

You should already feel comfortable with three parts of this quote:

• 5M = $5,000 par (or 5 $1,000 par bonds)
• ABC Debenture = Long-term unsecured bond from ABC Company
• 95 $\frac{\text{1}}{\text{2}}$ = Trading at $955

Let’s discuss the two new elements. 10s references the bond’s coupon (interest rate). Replace the letter ‘s’ with %, and you have a 10% coupon bond that will pay $100 in interest for every $1,000 par. This is a $5,000 par bond, so it will pay $500 in annual interest (10% x $5,000).

You could also see a zero coupon bond quote. Instead of a number followed by the letter’ s,’ it would rather appear as:

5M Zr ABC Debenture M’40 @ 95 $\frac{\text{1}}{\text{2}}$

We also see another ‘M.’ This time, it’s M’40. The quote references the maturity date when you encounter the letter ‘M’ followed by an apostrophe and a number. This bond matures in the year 2040.