A1.6.2. Bond Points, Basis Points, and Bond Notation
Bonds are quoted in the market in terms of their price and their yield to maturity. A bond “quote” just means the price at which a bond is trading, that is, its market price. The market price for bonds is quoted as a percentage of the bond’s par value. Percentages are expressed in terms of bond points. A bond point represents one hundredth, or 1%, of par. Thus, 10 bond points is 10% of par, and 5 bond points is 5% of par. Because corporate bonds typically have a par value of $1,000, 1 bond point is equal to $10.
Corporate bonds are typically quoted in increments of one-eighth (see first two examples, following). They may also be quoted in decimals of bond points (see third example, following).
1. A discount bond quoted at 97 1/8 will have a market price of 97.125% of par, or $971.25 ($1,000 × 0.97125). Another way of calculating this is first thinking that 97 bond points equals $970. An eighth of a bond point is equal to an eighth of $10, or $1.25. So $970 + $1.25 = $971.25.
2. A premium bond quoted at 101 3/8 will have a market price of 101.375% of par, or $1,013.75 ($1,000 × 1.01375).
3. A discount bond quoted at 97.5 will have a market price of 97.5% of par, or $975 ($1,000 × 0.975).
A bond’s yield to maturity is expressed in terms of basis points. A basis point equals one hundredth of a percentage point, and it represents the smallest increment of change in a bond’s yield.
One hundred basis points is 1%; 25 basis points is 0.25%. So when a bond’s yield to maturity increases from 4.25% to 4.79%, the bond yield is said to have increased by 54 basis points.
Corporate bond listings typically show the coupon (interest) rate, maturity date, and last price. The listing table in the media also shows the current yield and includes the volume traded. Corporate bond listings would look similar to those below:
