How Are Bonds Priced?
If you want to sell a bond or buy one on the bond market, you first need to know the latest in bond prices. For this information you can go online to a financial newspaper such as the Wall Street Journal or Barron's, or to the financial section of USA Today or your local paper. Bond prices do fluctuate, so the price you see quoted may change several times throughout the next business day.
Since there are far too many bonds to list — 1.5 million in just the municipal bond market alone — there is no single complete listing. A single listing would not be practical, as many bondholders hang onto their bonds until maturity. Therefore, the listings you will see are benchmarks from which you can determine a fair price. Interest rates impact bond prices in a broad sense. Fixed-income securities, as a rule, will therefore be affected similarly.
In the bond listings you will find key information for treasury, municipal, corporate, and mortgage-backed bonds. The numbers you will see listed may vary in format from paper to paper, but will include the following:
Rate 6½ percent: This is the yield that the bond is paying.
Maturity March 2011: This is the date of final maturity — in this case, March of 2011.
Bid 103:12: This means a buyer is offering a bid of $1,033.75 on a $1,000 bond, or a profit of just over 3 percent to the bondholder who bought the bond at a par value of $1,000. The numbers before the colon represent the percent of par value of the bond (in this case, 103% of $1,000 is $1,030). The numbers after the colon are measured in 32nds of $10 (here, 12/32 gives you $3.75 to add to that $1,030). This math works the same way for both the bid and ask.
Ask 104:00: This is the seller's lowest asking price, in this case $1,040.00.
You might also see an Ask/Yield entry, which gives the bond's yield to maturity based on the asking price. This shows how much the buyer will earn on the investment based on interest rate, and the cost of the bond. A buyer who bought the bond at more than the face value will receive a lower yield-to-maturity value. The opposite is true if the bond was purchased at a discount, which means it was purchased for less than par.
While the stock market sees consistent gains for long-term players, its volatility can be too much for some investors. During particularly volatile periods, more investors look to the bond market. Also, as more people reinvest money from plans like 401(k)s and pension plans, bonds become attractive places in which to invest. They offer income as well as greater security than equities.
Bond trading is brisk, so the price you see in the paper is likely to change by the time you make your decision to buy or sell. The price will also be affected by which broker can get you the best price on a particular bond. Don't forget that the dealers set their prices to allow for a spread, their profit on the transaction.
