IBM Bond Pricing

All bonds have some common characteristics, but they do not always have the same contractual features. Differences in contractual provisions, and in the underlying strength of the companies backing the bonds, lead to major differences in bonds risks, prices, and expected returns. It is important to understand how bond markets actually function and what the appropriate terminology is.

In your initial response to the topic you have to answer all 5 questions.

You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor.

1. Copy the quotation of one IBM bond that contains the price “Previous Close” in the last column. Present these quotations in your posting.

2. Describe the information that you received from the quote of the bond. You have to explain each number and symbol that appears in the bond quotation.

3. What was the last price of the bond in $$$ (listed in Previous Close)?

4. Compute annual coupon interest payments.

5. Compute current yield of the bond.

6. Compute YTM of the bond using the last price (listed in Previous Close). (Round the number of years to the whole number) Show your work.

7. Explain one major shortcoming for YTM and current yield.

8. How would the following affect the yield on newly issued bond? Please explain your answer.

a) The bonds are callable.

b) The bonds are subordinated to the existing bond issue.

c) The bond rating is better or worse than the Moody’s Aa3 that IBM anticipates.