4.5 – The Market & Quotes

🟥 Corporate Bond Market Basics

Where do most corporate bond trades occur?

In the OTC (over-the-counter) market

What is an OTC market?

A dealer network with no central location where securities trade outside exchanges

Do corporate bonds typically trade on exchanges like the NYSE?

No—only a small number do; most trade OTC!

What ultimately determines a corporate bond’s market price?

Supply and demand (though influenced by interest rates)

🟦 Corporate Bond Quotes Basics

How are corporate bond quotes expressed?

As a percentage of par value ($1,000).

What does a quote of “95” mean?

The bond is trading at 95% of par = $950 (or $955 with fraction)

What is 1 bond point equal to?

$10

What does a quote of 98 represent in dollars?

$980 (98 × $10)

Fractions & Pricing

Corporate bond quotes use what type of fractions?

Eighths (1/8) or Reduced from Eighths.

Is a fraction valid if it’s not in eighths or reduced from eighths?

No.

Convert 102 1/8 to a dollar price.

• 1/8 = 0.125

• 102 + 0.125 = 102.125

• Move decimal → $1,021.25

Convert 98 3/4 to a dollar price.

• 3/4 = 0.75

• 98 + 0.75 = 98.75

• Move decimal → $987.50

Why are fractions used in bond quotes?

To show prices between $10 increments.

Quote Components

What does “M” mean in a bond quote?

$1,000 units of par value. (Roman numeral for 1,000)

What does “5M” represent?

$5,000 par value. (5 bonds)

What does “10s” mean in a bond quote?

10% coupon. (interest rate)

What does a 10% coupon pay annually per $1,000 bond?

$100 per year.

What does “Zr” mean in a bond quote?

Zero-coupon bond.

What does “M’40” mean?

Maturity year = 2040 (M’ - M then apostrophe)

Full Quote Interpretation

Interpret: “5M 10s ABC Debenture M’40 @ 95”

• 5M = $5,000 par

• 10s = 10% coupon

• ABC Debenture = unsecured bond

• M’40 = matures in 2040

• @95 = $950 per bond

Quick Memory Trick 1 ⚡

Quick way to convert bond quotes to price?
- Add fraction → move decimal one place right

Quick Memory Trick 2 ⚡

What’s the MOST tested concept from this section?

- Converting bond quotes (especially fractions)