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18-20 Securities: Stocks & Bonds CH 18]

Companies in raising funds may offer bonds at differing times with different maturity
dates. Table 18.2 lists Frontier Communications, Ford Motor company, Morgan Stanley,
Royal Bank of Scotland, and Vodafone as having issued more than one bond with different
Alien: From another maturity dates. Frontier Communications has listed four bonds with four different interest
country doing rates for the coupons each with a different maturity date. There are investors who will
business in the purchase bonds (loan their money) with different maturity dates, and even foreign
United States. companies, such as Royal Bank of Scotland. The Royal Bank of Scotland, an alien bank,
offers bonds to investors in the United States.
Foreign: A The ability to sell bonds is not limited to publicly traded companies. The ability to offer
company
incorporated in a bonds in the market is open to ALL corporations which include privately held companies
another state other such as Albertsons or Cargill.
than the one in Albertsons Companies, Inc. (SVU) is a food and drug retailer in the United States. The
which it is doing Company’s stores offer grocery products, general merchandise, health and beauty care
business. Setting up products, pharmacy, fuel, and other items and services.
business location in The Albertson's brand is used by both a public and private company. The public
another U.S. State.
company is Supervalu (ticker symbol SVU) which owns the brand and operates 550+
Domestic: Doing Albertson's stores. Privately-held Albertsons, LLC licenses the brand from Supervalu and
business in the operates stores in Florida and the Great Plains, Mountain and Southwestern states.
State in which it is Commission on Bond Transactions. Commissions paid on bond transactions increase
incorporated.
the buyer’s costs and decreases the seller’s proceeds. The broker, acting as an agent for
both the buyer and seller, charges each for a transaction. These fees vary by broker, but can
range from $10 to as much as $75 as a flat fee. As a percentage of the transaction, the fees
range from 1% to 5%. Commissions earned by the broker must be disclosed to the client
when the transaction is confirmed.
Cost of Bonds Bought on the Interest Date. Interest earned is paid on the date
specified on the bond certificate. The payment is for interest earned and thus is a payment
accrued.
Many bond certificates provide for semi-annual interest only payments. A semi-annual
payment is one made every 6 months. Semi-annual bond payments are made on January 1
and July 1. The January 1 payment represents interest earned from July 1 to December 30
and the July 1 payment is for interest earned from January 1 to June 30. The investor who
sells bonds on their interest-payment date is entitled to the interest for the preceding six
months. The buyer of the bonds begins earning interest on the date of purchase. The
investment in bonds purchased on the interest date is the sum of the total market value of
the bond plus the commission paid for that purchase.
Expenditure for Bonds Bought Between Interest Dates. Bonds are not typically
Settlement Date: purchased on their interest date, thus the seller is entitled to the accrued interest on the
This term describes bond until the settlement date for the new purchaser. The settlement date is the date on
the date on which a which the buyer makes payment for their purchase and acquires title to the bond. As there
trade is completed is accrued interest to the seller the buyer also pays the seller that interest due knowing that
(settles). That is, the he will receive a reimbursement with the next interest payments.
actual day on which To determine the buyers’ total expenditure when bonds are bought between interest
transfer of cash or
assets is completed dates, proceed as follows:

and is usually a few 1. Determine the total market value of the bonds by multiplying the price of one bond
days after the trade by the number of the bonds in the purchase.
was done.
2. Calculate the accrued interest on the face value of the bonds at the stated interest
rate for the time from the preceding interest payment date to the settlement date.
3. Calculate the total commission charges by multiplying the commission per bond by
the number of bonds in the purchase.
4. Calculate the total expenditure for the bond purchase by adding together the total
market value, the accrued interest, and the total commission charges.
Use the following equation to calculate the Total Cost.
Market Value + Accrued Interest + Commission = Total Cost
Example: Ten $1,000 bonds, with 9% interest payable January 1 and July 1, were
purchased at current value of 96.875 plus accrued interest and commission
of $12 per bond. The interest accrual was for 100 days. Calculate (a) the total
market value of the bonds, (b) the accrued interest, (c) the total commission,
and (d) the total Cost for the bonds.
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