Understanding the T-Bond Tables in the WSJ

Terminology:
A bond has two parts a face amount of $1000, and a coupon. Every six months the bond pays off
one coupon, until the maturity date. On the maturity date the bond's owner receives the face
amount ($1000) plus the final coupon payment.
A bond's coupon rate tells you the coupon amount. The formula is (coupon rate)1000/2. For
example, a 6% coupon means that the owner receives $30 every six months.
Bond prices are quoted in units of 100, and net of accrued interest. The fact that a bond is quoted
in units of a 100 only means that the quote is for 1/10 of the bond's value. The term unit of 100
comes from the fact that 1/10 of the face value equals 100. Accrued interest is defined as follows.
Let t0 represent the date of the last coupon payment, t1 the date of the next payment, and J today's
date. Then the formula is

where, for example, t1-t0 equals the number of days between payments.
While the above accrued interest formula looks somewhat sensible it is not the exact formula used
in the corporate and municipal bond markets. For bonds in these two markets, that pay semi-annual
coupons, accrued interest is calculated under the assumption that a year has only 360 days and each
month 30 days! Thus, the formula becomes

Since all months are assumed to have 30 days this means that the accrued interest on August 31 and
September 1 will be the same. As an example, consider a bond that pays coupons on January 15 and
July 15. On March 15 two months will have passed and so the accrued interest will equal
(60/180)coupon. Notice that even February is assumed to have 30 days! On March 31 the accrued
interest will be (75/180)coupon and on April 1 it will still be (75/180)coupon.
Examples:
You look in the WSJ's bond table and see the following:

Page 1 of 2.

GOVT. BONDS & NOTES

Rate

Maturity
Mo/Yr

Bid

Asked

Chg.

Ask.
Yld.

July 06n

105:21

105:23

11

6.15

This bond has a coupon rate of 7%, so it pays $35 every six months. It matures July 2006. The "n"
means that this is a note. A note is any government bond that was issued with a maturity of 10 years
or less. A bond is identical to a note, but was issued with a maturity of over 10 years. The bid
equals 105:21, which translates into a quote of $

. Thus, you can sell the bond for 10 times

this amount plus the accrued interest (recall quotes are per $100 of face value). Usually, when
people discuss what a bond costs, they will quote per $100 of face value for the accrued interest also.
In other words they will quote the accrued interest as if the coupon equaled 1/10 its true value.
As a retail customer you sell at the bid, and buy at the ask. If you ever have any trouble remembering
this, just recall that you buy high and sell low. The change of 11 means the asked was 105:12
yesterday. Finally, the "Ask. Yld." is supposed to tell you the bond'syield to maturity. (The yield
to maturity equals the internal rate of return on a bond.) Alas, it does not. Personally, I do not know
the exact formula for calculating the ask yield (it is very complicated and varies by the time
remaining until the bond matures). Unfortunately, this means that if you ever want a bond's true
yield to maturity you will have to calculate it yourself.

Page 2 of 2.