The Retirement Corporation of America

How to Read Bond Prices in the Newspapers

BOND PRICES ARE reported a little differently every day than stock prices. But they aren't hard to understand, once you become familiar with a few terms.

First of all, the particular bond you own may very well not be listed. Since there are more than 1.5 million bonds in the municipal market alone, it isn't possible to publish the prices of all of them. There wouldn't be much reason to do that anyway because only a tiny fraction of the bonds outstanding trade on any given day. Remember, bonds are buy-and-hold investments.

So, the bond tables in the financial pages of your local paaper merely give you a sample of the going prices for various kinds of bonds. But it should be enough for you get a pretty good idea of what a fair price would be for a bond you're thinking about buying.

Bonds with similar maturities tend to move up or down about the same amount with changes in interest rates. But keep in mind that credit quality also affects a bond's price and the bond tables in the papers don't give you that information.

One publication may use a format that differs a little from another's. But the bond listings usually look something like this:

The Treasury Market

Both bonds are U.S. Treasury issues that will mature in 2006. The bond in the top row (#1) will mature in February of that year. The bond in the bottom row (#2) will mature in November of that year. Let's look at both in more detail:

Bond #1. It was issued years ago when interest rates were far higher than they are now. The coupon rate is the rate set when the bond was first issued. In this case, the coupon rate is 9 3/8%—which is far higher that the coupon rate on any newly issued bond in years.

The bid price tells you that the bond is trading for just over 117% of par. In other words, it is trading for around $1,171 in the market. It is because the bond pays an interest rate so much higher than any newly issued bond, that it is selling at such a large premium. Investors will pay a high price to buy that high coupon. Sellers expect to be paid a high price for such high-coupon bonds. If you bought the bond when newly issued and sold it at today's price, you'd make a nice price.

The "change" figure means that the price of the bond did slip a little in trading the day before.

The yield is how much you'd earn from the bond if you bought it at the current price. The coupon rate is 9 3/8%, but that's if you bought the bond at par. You're paying a big premium, which cuts the yield to 4.33%.

Bond #2. The bond at the top row offers a coupon rate far above what new bonds are offering. The bond in the bottom row offers a coupon rate of only 3 1/2%—far below what new bonds are offering.

Because the coupon on this bond is below what newly issued bonds are offering, it must be sold at a discount. That's why the bid and asked prices are about 95% of par. That means the bond is going for around $950 in the market.

The "change" figure means the price of the bond also slipped a little the day before.

Finally, look at the yield. The coupon is 3 1/2%, but you can buy the bond at a discount. That brings the yield up to 4.53%—even more than you'd earn by buying the bond in the top row, which carried a higher coupon rate. If you had bought the bond when newly issued and sold it at today's price, you'd take a substantial loss.

Compare the two bonds. You'll see that, while they came to market with very different coupon rates, the market has brought the yields of the two bonds very close together—by putting a premium on the high-coupon bond and selling the lower-coupon bond at a discount.