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Discussion Starter · #1 ·
Does anyone out there trade bonds on a somewhat regular basis?

Looking at BMO InvestorLine as an example, the CITIGROUP CDA 4.90% 13NOV12 bond is currently selling for $102.90 per $100, which gives an S/A yield of 2.032% and Annual of 2.043%.

I know the mechanics of the math in valuing the bond (e.g. the yields are the IRR based on the current price), but I'm confused on the price of the bond itself. Does the price reflect the actual market price (e.g. what seller's Ask price is), or is the price being calculated based on the yields?

Thanks,
-10d
 

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Does the price reflect the actual market price (e.g. what seller's Ask price is)
The seller in this case is your BMO InvestorLine.
For you as a secondary market investor, that is the market price.
or is the price being calculated based on the yields?
Isn't it the same thing?
i.e. your YTM will depend on what you pay for the bond.
The YTM that the bond quote shows is based on the Ask price that you see.
If you buy at that price, that is the yield you will get.
 

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Just a suggestion I didn't see mentioned: look at the bond credit rating to guage the risk and ability of the company paying your money back.

I noticed that Citigroup is listed in the Claymore CHB junk bond ETF. Citigroup is rated DD=high risk of default. I don't know if this is the same bond, but just show some of the risks involved.
 

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Discussion Starter · #5 ·
tendim said:
I know the mechanics of the math in valuing the bond (e.g. the yields are the IRR based on the current price), but I'm confused on the price of the bond itself. Does the price reflect the actual market price (e.g. what seller's Ask price is), or is the price being calculated based on the yields?
Isn't it the same thing?
Well, kind-of. I was trying to figure out if they were using some basis for the IRR (e.g., BoC treasury bonds) to establish the price, or if they were using the current market price based on supply and demand to calculate the yield. It could go either way: you either pick a yield and calculate the market value based on the PV, or use the PV and calculate the IRR.

In any case, in the situation of holding the bond to maturity (what I am planning on), I have my own required rate or return. So as long as the bond is selling for less than the PV of my own IRR I'll be okay. :)

Cheers,
-10d
 

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I was trying to figure out if they were using some basis for the IRR (e.g., BoC treasury bonds) to establish the price, or if they were using the current market price based on supply and demand to calculate the yield.
The ask price for your bond is probably "matrix" pricing being quoted by the brokerage.
They get their inventory from the jobbers, the trading desk "sells" to the retail desk at the transfer price, they add their commissions and sells to you at the ask price.
Since there is no trading exchange for this, you don't have much choice, unless you have multiple brokerage accounts or are planning to buy a huge quantity and can negotiate directly with the bond desk.

In any case, in the situation of holding the bond to maturity (what I am planning on), I have my own required rate or return. So as long as the bond is selling for less than the PV of my own IRR I'll be okay.
Yes, that works.
Make sure you read the original offer prospectus of that specific bond and familiarize yourself with the full terms and conditions before you buy.
 
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