I am newbie in finance and I recently saw Bloomberg bond yields quoted as follows:
Can anyone specify what "1 month" and "1 year" mean? What do coupon, price, yield and time (EDT) mean?
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2 Answers
The 1 month and 1 year columns show the percentage change over that period. Coupon (coupon rate) is the amount of interest paid on the bond each period (as specified on the coupon itself. Price is the normalised price of the bond; the price of taking a position of $100 worth of the principal in the bond. Yield is the interest rate that you would receive by buying at that price (this is the inverse of the price). The time is the time of the quote presented.
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can you please explain what does that "the price of taking a position of $100 worth of the principal in the bond" mean Jul 21, 2016 at 7:20
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what percentage change is, does it mean percentage change in face value or yield price Jul 21, 2016 at 9:22
The first thing that it is important to note here is that the examples you have given are not individual bond prices. This is what is called the "generic" bond price data, in effect a idealised bond with the indicated maturity period. You can see individual bond prices on the UK Debt Management Office website.
The meaning of the various attributes (price, yield, coupon) remains the same, but there may be no such bond to trade in the market. So let's take the example of an actual UK Gilt, say the "4.25% Treasury Gilt 2019". The UK Debt Management Office currently lists this bond as having a maturity date of 07-Mar-2019 and a price of GBP 116.27. This means that you will pay 116.27 to purchase a bond with a nominal value of GBP 100.00. Here, the "nominal price" is the price that HM Treasury will buy the bond back on the maturity date.
Note that the title of the bond indicates a "nominal" yield of 4.25%. This is called the coupon, so here the coupon is 4.25%. In other words, the treasury will pay GBP 4.25 annually for each bond with a nominal value of GBP 100.00. Since you will now be paying a price of GBP 116.27 to purchase this bond in the market today, this means that you will be paying 116.27 to earn the nominal annual interest of 4.25. This equates to a 3.656% yield, where 3.656% = 4.25/116.27.
It is very important to understand that the yield is not the whole story. In particular, since the bond has a nominal value of GBP100, this means that as the maturity date approaches the market price of the bond will approach the nominal price of 100. In this case, this means that you will witness a loss of capital over the period that you hold the bond. If you hold the bond until maturity, then you will lose GBP 16.27 for each nominal GBP100 bond you hold. When this capital loss is netted off the interest recieved, you get what is called the gross redemption yield. In this case, the gross redemption yield is given as approximately 0.75% per annum.
NB. The data table you have included clearly has errors in the pricing of the 3 month, 6 month, and 12 month generics.
