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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (5795)	1/23/2004 8:50:50 AM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 110194

If you are so smart, explain how the price of a bond yielding 9% under current conditions can be equal to par. i will ignore your sad impertinence borne of lack of knowledge and answer this question for the benefit of others who may be interested. for reference, the article in question, which laughably says the US is "renegeing" and "defaulting" on its contract for a particular bond issue (the 9 1/8s of 2009), may be viewed at etherzone.com. in message 5790 on this thread, you write: Let's see - the present value of an $1000 treasury bond, 5 years to expiration, yielding 9%, is, at 3% 5-year interest rates, $1250. So, it seems to me, these guys got robbed for $250! you reveal your basic misunderstanding of how bonds work. these bonds are not priced at 1250 (this would be a quoted price of $125 in common parlance). i checked the quote yesterday and saw an ask around $102.50. as quoted above, you wonder how the bond "yields" 9%. you are confusing the coupon with the yield. the coupon is what the bond yields at purchase if bought at par. the bond pays off at par. in between purchase and redemption, the bond can trade at a premium or discount, with the yield adjusting down or up accordingly. furthermore, since it is a callable bond, the market is pricing it at a Yield To Call, not a Yield To Maturity. in my opinion, the Yield To Maturity is irrelevant for a bond maturing in 5 years but callable in 3 months. i cannot imagine anyone knowledgeable buying this bond today thinking they will get to hold it till maturity. if i bought it and was able to hold it past a single call date i would consider myself exceedingly lucky. checking the quote screen, i see the ask for 250K face at retail is around 102.58, for YTM of 8.504%. but you need to look at the call information to figure the Yield To Call. assume, hypothetically, that 100K face of the bond is bought on Jan 15 at 102.58 and redeemed on May at 100. then approximate cash flows are as follows: Costs Cost of bond: -102,580 Accrued interest for approx 2 months: -1519 Total cost: -104,099 Proceeds Assume bond is called in May at 100, so there are proceeds: Principal: 100,000 Interest: 4562 Total proceeds: 104,562 Profit/loss analysis Total cost: -104,099 Total proceeds: 104,562 Profit total: 463 Effective Yield To Call: 463 / 104,099 = 0.44476% Annualized Yield: 0.44476% x 4 = 1.779% so, in this hypothetical case, holding three months for an annualized approx 1.8%, in an environment where many money funds are below .5%, does not strike me as the worst deal in the world. it also does not strike me as the US govt defaulting on its Holy Contract. note that the above analysis is nothing but a hypothetical fantasy, and backdates a bit to Jan 15 for simplicity's sake (even three months); the accrued interest today, and the remaining interest, would be different. any holes in this line of thinking, please point them out, anybody... call information provided with Bond CUSIP 912810CG1 Description: U S TREAS BD 9.125%04-09 CALLABLE 04 DUE 05/15/09 Call Information: Date: 05/15/2004 Price: 100.0 Description: CALLABLE Date: 11/15/2004 Price: 100.0 Description: CALLABLE Date: 05/15/2005 Price: 100.0 Description: CALLABLE Date: 11/15/2005 Price: 100.0 Description: CALLABLE Date: 05/15/2006 Price: 100.0 Description: CALLABLE Date: 11/15/2006 Price: 100.0 Description: CALLABLE Date: 05/15/2007 Price: 100.0 Description: CALLABLE Date: 11/15/2007 Price: 100.0 Description: CALLABLE Date: 05/15/2008 Price: 100.0 Description: CALLABLE Date: 11/15/2008 Price: 100.0 Description: CALLABLE