After you have evaluated the credit worthiness of a particular issuer, the next step is deciding upon an appropriate valuation for that bond. There are three good ways to do this. The first method is to look at where the bond has previously traded. This can be done by looking at trade history information on Bloomberg, which is collected from the TRACE reporting system. Typing <TDH> into your terminal will provide a listing of recent trade dates, times, and prices for a particular bond. Keep in mind that pricing can vary greatly from day to day and also by size of trade, so it is best to treat this historical pricing as indicative only.

SEE: An Introduction To Corporate Bond ETFs

In the bond market, most securities trade on a spread basis (spread represents the additional compensation an investor receives over U.S. Treasuries in return for accepting greater risk.) Therefore, the second method of valuing a corporate bond is to evaluate its spread. There are a variety of Bloomberg functions for this, but a good place to start is by typing <YAS> into the terminal. This screen allows you to change inputs such as the price of the bond, the yield of the bond, or the spread to Treasuries of the bond. You can manipulate these inputs until you reach a level at which you think the bond is attractive; this level can then be your target price when attempting to purchase bonds.

Note: If the bond you are interested in is callable, you can use the yield-to-call function (<YTC>) to determine whether you are comfortable holding that bond regardless of whether or not it is called.

The final method of valuing a corporate bond is to compare its pricing with that of its peers. For instance, you might want to compare a five-year Citigroup bond with five-year bonds issued by JP Morgan, Bank of America, and Wells Fargo. You can then use the tools described above to analyze the relative valuations of each of the issuers in order to determine if you're comfortable with the value you are receiving when purchasing the Citigroup bond.

SEE: Callable Bonds: Leading A Double Life

Next: How To Analyze Corporate Bonds With Bloomberg Terminals: Trading Bonds On Bloomberg »

comments powered by Disqus
Trading Center