The Basics of Bond-Picking: Pricing and Quotes

Bond-Picking Homework

Here is a four-step assignment for comparing different types of bonds. The focus: Bonds with a maturity date of 10 years or more.

Step 1. First, look at corporate bonds. Go to the Yahoo! Finance Bond Screener. Once you're there, check the "Corporate" box, and select a "Maturity Range (min)" of 10 years to view the corporate bonds that mature in 10 years or more. Then click the "Find Bonds" button.

Step 2. Compare the "Yield to Maturity" column with the "Fitch Ratings" column. Note that as the Fitch Rating descends from AAA, to AA, to BBB, to BB, and so on, that the Yield to Maturity increases. In other words, bonds from such AAA rated companies as Federal National Mortgage Association FNM or United Parcel Service UPS have a lower yield to maturity than CCC rated companies, such as JetBlue JBLU or Rite Aid RAD.

What is the yield on AAA bonds? What is the yield on CCC bonds? How much more is the yield on the lower rated bonds?

Step 3. Return to the Bond Screener. Uncheck the "Corporate" box and check the "Treasury" box instead. Select a "Maturity Range (min)" of 10 years to view the Treasury bonds that mature in 10 years or more. Then click the "Find Bonds" button.

Step 4. Treasuries are the safest bonds because the U.S. government, unlike any corporation, can essentially print money, thus guaranteeing that your principal will be returned. What is the YTM on typical 10 year Treasuries? How much less are you being paid for this margin of safety than an AAA rated corporate bond?

Knowing the basics of how bonds are priced and quoted should give you a better understanding of the bond market. In subsequent lessons and assignments, we'll examine the topics of safety, yield and return.