How to Interpret Bond Quotes

Procedure

1). Find a source of bond quotes. This could be a financial newspaper such as the Wall Street Journal, your broker's research and quote tools, or a website such as Yahoo! Bonds, among many others. The exact resource you will use depends on the type of bond quote you're interested in. For example, U.S. Treasury bond quotes are widely available from many sources, but obtaining quotes for obscure corporate bonds or bonds issued by small foreign governments--called "sovereign bonds"--is much more difficult.
2). Look up the company or government you're interested in. You can use its name or its CUSIP code--a nine digit serial number that uniquely identifies bond issues. In our example, we'll look up bonds issued by the General Electric company (GE) on Yahoo! Bonds (http://finance.yahoo.com/bonds) by simply typing "General Electric" into the search box. The procedure is similar for other data sources.
3). Find the particular GE bond you're interested in. The result page (http://reports.finance.yahoo.com/z1?is=General+Electric) shows us every outstanding bond issued by General Electric. The different columns tell us information about the different aspects of a particular bond issue in addition to the quote itself. The "Maturity" column tells us when the principal balance is repayable. The "Coupon" column tells us what percentage of par, or the principal amount, is paid out annually. These characteristics identify a particular bond issue. For example, at the time of this writing, there were two outstanding GE bonds quoted, one expiring Dec. 6, 2017, and paying a coupon of 5.250 percent, and one expiring Feb. 1, 2013, and paying a coupon of 5.000 percent. Most bonds today are sold with a par value of $1,000. The latter issue therefore specifies that $50 will be paid to the bondholder annually until Feb. 1, 2013, whereupon $1,000 will be paid to the bondholder to refund the principal balance of the loan.
4). Check the price quoted for your bond. The quote portion provides us with information about the bond's current value at the time of quotation. Yahoo's "Price" column actually tells us the "bid price", or the price someone in the market is offering for the bond when the quote was created. More sophisticated quote systems also provide an "ask price," which is the price at which someone in the market is willing to sell the bond. These prices are expressed as a percentage of par. At the time of this writing, on Dec. 2, 2009, the GE 2017 bond (i.e. the one expiring in 2017) was quoted at 100.52. Recall that par is typically $1,000; this means that you could sell the bond for 100.52 percent of $1,000, or $1,005.20 (minus your broker's commission).
5). Check the "yield" quoted for your bond. The "coupon" rate tells you the annual interest rate paid by the borrower as a percentage of the bond's par value, which is $1,000. The 2017 GE bond pays a coupon of 5.25 percent (of par), meaning it pays the holder an annual interest payment of $52.50. If you buy the bond on the secondary market today for $1,005.20, you will still receive only $52.50 per year in interest. The "yield" tells you the effective interest rate based on the current price of the bond rather than based on the par value. Yield moves inversely to price. In the case of the 2017 GE bond, the yield is 5.223 percent, which is slightly lower than the coupon (5.25 percent) because the current price, $1,005.20, is higher than the par value of $1,000. In other words, the annual interest payment of $52.50 is 5.223 percent of the current price. (If the price were lower than the par value, the yield would be higher than the coupon.)
6). Check the "yield to maturity" (YTM) quoted for your bond. There is a slight problem with the "yield" rate--when the bond matures, you still receive a repayment of $1,000 from the bond's issuer, regardless of how much you paid for it. The "yield to maturity" is an annualized interest rate which also factors in any any profit or loss caused by buying the bond today at a price which is different from par. It also assumes that you re-invest all interest payments at the same rate as the current bond yield. Calculating yield to maturity is rather complicated and beyond the scope of this article; the important thing to know for our purposes is that the YTM tells you the effective annual interest rate a bondholder will be paid from now to maturity of the bond, taking into account reinvestment of interest payments and profit or loss caused by the current bond price being under or over par. The GE 2017's "yield to maturity" is 5.174 percent, which takes these factors into account. It is slightly lower than the yield because the bond is currently selling at a premium to par (that is, at a price higher than par), which means the principal repayment will be less than the amount paid for the bond.
7). Check the credit rating. Yahoo tells you the "Fitch rating," which is the credit rating of the company that issued the bond. The issuer's creditworthiness is the main factor affecting the current price of the bond in the secondary market. If, for example, a company were to suddenly lose a large amount of important business, its credit rating could suffer, which would make its bonds cheaper as many investors rush to sell their bonds. A cheaper price means a higher yield-investors want to be compensated for the increased risk of default--that is, failure to pay back money owed--by means of a higher interest rate. If, on the other hand, a company introduces a very successful new product with reasonable prospects of long-term success, its credit rating might be upgraded, as it will then be viewed as less likely to default on its borrowing. An improved credit rating will increase investor interest in owning the bond, which will increase its price (and decrease the yield) as many investors seek to buy it. Credit rating systems vary by issuer. Yahoo uses the Fitch ratings, which are (in descending order of credibility) AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. Consult their website, linked in the Resources section, for further information on their ratings system.
8). Check the callability of the bond. A "callable" bond can be redeemed early--before its maturity--after the "callable date" at the option of its issuer. This means that the issuer pays back the principal early and ceases to pay the periodic interest payments. The issuer might do this if market interest rates are low at the callable date in order to refinance at a lower rate. Callable bonds will typically have slightly higher coupons than similar non-callable bonds to compensate investors for the risk of being called before maturity and thus not receiving some of the interest payments. Most bonds are not callable.