Bond valuations and yields: What do they mean, and how do you derive their values? Consider the following case of investment-grade bonds issued by Procter & Gamble Co. (P&G) in August 2011. Proctor & Gamble (NYSE: PG) Issue Details Issue Size ($Mil) $1,000 Coupon 0.700% Maturity Date 08/15/2014 Coupon Type Fixed Callable Yes Coupon Frequency Semiannually Proctor and Gamble's total amount of debt increased from 31.9% in March 2011 to 34.2% in December 2011, mainly due to its net debt issuances to fund general corporate purposes. What was the annual cost of the funds to P&G raised from the $1.0 billion bonds that mature in 2014? basis points. Historical Treasury Rates If the bond sold at 100.10 at the time of issue, investors observed that required - S Year Neminalannual yield would be Difference Looking at the comparable U.S. Treasury yield, these bonds were issued at a spread of basis points. 0.79% Because the coupon rate is 0.19% the yield required by the market, the bond sold at at the time of issue. eAu-Bhds and Their Valuation July 2011 Sept. Oct Time Period 2012 Source: U.S. Department of Treasury, ited on Movrringstar.com chitp://qucktake.momingstar.com/StockNet/bonds.asqpx7Symbol-PGACountry USA> lf the new observed yield of the bond is 1.8%, the bond is likely to be trading at a price oft If the current yied is higher than the coupon rate, investors would want a higher return on their investment. If the coupon rate is less than the yieid required by the market, the price of the bond is most likely to be the par value of the bond, and the bond will sell at As interest rates increase, the yield recuired by the market vill Increase, and the price of the bond is likely to " Thus, when the yield increases to 1.8%, the bond's price -by Understanding yield to call and when bonds are called Suppose the bond had a call structure that allowed the company to call its bonds after one year. The call structure of the bonds states that the bonds would be callable at par What would be the yield to call? In what situation would the company call the bond? 1.800% 2.349% 4.013% 3.290% O When current yield on the bonds falls O When interest rates rise O When interest rates fall O When the bond's price rises From an investors perspective, if the investor holds these P&G bonds in their portfolio and market interest rates rise, the bonds' value in the fixed-income asset class in the portfolio will most likely rates fall, the value of bonds in the portfolio will ; but if market interest