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Posted by Will on October 8, 2008, 5:28 am
>
>> The Investinginbonds.com web site allows you to see a history of trades
>> for
>> specific bonds. Here is two lines of a typical report, reformatted to
>> make it readable here:
>>
>> Time of Trade: 10/02/2008 16:31:17
>> Price Paid: $94.480
>> Yield: 19.742%
>> Size: $4K
>>
>> Time of Trade: 10/02/2008 16:30:55
>> Price Paid: $85.572
>> Yield: 45.404%
>> Size: $50K
>>
>> What I don't understand in the above is how are they calculating the
>> Yield?
>> It cannot be that the same bond that gives the same coupon payment would
>> have the yields they are reporting given the sale prices.
>
> Looks like the reported yield is likely yield-to-maturity (YTM), *not*
> coupon yield. Do some googling on "yield to maturity" as well as
> "internal rate of return" and "net present value" (the YTM calculation
> is essentially an IRR calculation, and that in turn depends on the NPV
> concept).
Let's assume they are using Yield to Maturity. So my present value is what
I pay today, and I generate from that cash flows at each coupon date and
then on repayment of the par. From those cash flows one can calculate an
internal rate of return (IRR).
Having said that, I am still confused. The above two lines I gave were for
the *same bond* and the difference in time of the trade is less than 30
seconds. So even if one wants to construct a yield to maturity IRR, I
don't see how the second trade above gets a 45.4% yield to maturity but the
first trade gets only $19.742% Can the yield to maturity be so remarkably
different for such a small difference in the current bond price?
Can someone recommend any software that would take as input the CUSIP, and
would show as output the stream of expected cash payments, and a calculation
of the IRR for that CUSIP? Of course I can do that in Excel but being
able to enter in a large group of these bonds (say 25 to 100) and have the
software constantly update the YTM calculation against current trades would
be a wonderful tool to have.
--
Will
======================================= MODERATOR'S COMMENT:
The moderators would be in your debt if you were to trim the posts a little
tighter.
--------------------------------------
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