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CH 18] Calculating Business 18-15

ticker, the Coupon % (interest rate on the bond), Maturity date, Current Value % (current
trading value of the $1,000 bond), followed by market activity for both the bond and the
stock of the company.
The Coupon % is the interest the company is paying on the face value of the bond. If the
Coupon Interest is 6.250 then the interest earned on a $1,000 bond is (0.0625 x $1,000 =)
$62.50 per annum. The bond holder receives this interest semi-annually and will receive
($62.50 ÷ 2 =) $31.25 with each semi-annual payment.
Current Value % is the current selling price of a $1,000 bond. A bond with a Current
Value % of 69.000% is selling for ($1,000 x 0.69 =) $690, whereas a bond with a Current
Value % of 388.000% is trading for ($1,000 x 3.8800 = ) $3,880.
The approximate rate of return on a bond investment is easily calculated by dividing the
Coupon % by the Current Value %. The equation is:

Bond Rate of Return = Coupon % x 100%
Current Value %

Frontier Communications (FTR) bonds with a maturity date of September 15, 2027 lists a
Coupon % of 6.250 (6.25%) and its Current Value % is 65.500. The bond rate of return is
calculated by dividing the Coupon % by the Current Value %:

Bond Rate of Return = 6.250 % x 100%
65.500 %

= 0.095 x 100%

Bond Rate of Return = 9.5% x 100%

which is higher that the Coupon %

The following examples are taken from Table 18.2

Example A: What is the Bond Rate of Return for John Deer Capital (DE) with a Coupon %
of 3.050 a Maturity date of January 6, 2028, and a Current Value % of 65.
Reading Company (Reading
Solution algorithm: Railroad) $1,000 bond at 3 / 8%
1
Bond Rate of Return = 3.050 % x 100% Interest with bond coupons for
65 % payment of $15.63 each.

= 0.047 x 100%

Bond Rate of Return = 4.7% x 100%

The Bond Rate of Return is higher than the Coupon %

Example B: What is the Bond Rate of Return for Kraft Heinz Foods (KHC) with a Coupon
% of 5.000 a Maturity date of July 15, 2025, with a Current Value % of
205.000.

Solution algorithm:
Bond Rate of Return = 5.000 % x 100%
205.000 %

= 0.0244 x 100%

Bond Rate of Return = 2.44% x 100%

The Bond Rate of Return is lower than the Coupon %

Primary market: Where securities are created. It's in this market that firms sell new stocks and bonds to the
public for the first time

Secondary Market: The defining characteristic of this market is that investor’s trade among themselves.
Investor’s trade previously issued securities without the issuing companies' involvement.

IPO: Initial public offering is a type of public offering in which bonds or shares of a company are sold to 18
institutional investors and usually also retail investors; an IPO is underwritten by one or more investment
banks, who also arrange for the shares to be listed on one or more stock exchanges.

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