6.6 Reading the nancial press

Notice rst of all some of the characteristics of bonds that we referred to earlier in

this chapter. The title of each bond contains the coupon rate and the redemption

date. The bonds are listed in ascending order of residual maturity. Notice also:

l

The rst column shows the current price of the bond (this is the mid-point in thespread between the bid and offer prices quoted by market makers). Remember thatquoted prices are ‘clean’ prices – they do not include interest which has accruedon the bond since the last coupon payment. In most cases, buyers will have tohand over more than the price quoted in the table. The difference will be theinterest due to the seller for the period during which he held the bond since thelast coupon payment.

l

The second column shows the redemption yield calculated on the basis of theprice shown in the rst column. The next four columns show the change in theredemption yield calculated over various periods. If we just look at the change onthe day, we can see, for example, that the yield on Treasury 4.75% 2020, hasincreased by 0.09. In fact, the redemption yield rose on all bonds in the list. Fromour earlier discussion about the inverse relationship between prices and yields we can use this information to conclude that all bond prices must have fallen in trading on 17 May – and this is entirely consistent with the commentary that we read in Box 6.8.

l	The next two columns show the highest and lowest price at which the bond hastraded over the last year. This gives us a range against which to judge the presentmarket price.

l

The nal column is a recent innovation and shows the total market value outstand-ing of each bond issue. So, for example, we can see that there are £10,743m-worthof Treasury 4.75% 2020 available in the market. (Notice that the units of measure-ments are £m, so there are over £10.7bn-worth of our stock outstanding.)

Box 6.11 shows similar information for ordinary shares. This is an extract from

the pages headed ‘London Share Service’ and contains details of the shares of

companies whose main business is food and drug retailing. The table appeared on

18 May 2006.

Notice:

l	The rst column shows the current price (as with bonds this is the mid-price fromthe bid-offer spread).

l	The second column shows the change in price that occurred during trading on 17 May.

l	The next two columns show the highest and lowest price achieved during the last year.

l	The fth column shows the dividend yield. This is the last dividend paymentdivided by the current share price.

l	The penultimate column shows the P/Eratio and conrms what we said in the last section, namely that P/Eratios can vary widely even between companies inthe same sector.

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Chapter 6 • The capital markets

Box 6.11

UK retailers’ share prices

FOOD & DRUG RETAILERS

Allnc UniChem............91419944726.502.216.41,143

Dairy Fm S.................187.62xd3.18224.77147.392.423.5397

Euro HomeRetail......†53.50213141.506.46.745

Greggs.......................£34.75xd1.13£49.66£34.753.012.1108

JardnMt S..................964.60xd15.90£11.08874.055.05.2137

Morrison..................q189.25xd3218.35158.251.9–24,325

Sainsbry............... ♣q329.50173602702.355.641,007

Tesco................. @♣q318.50xd1.253512922.715.887,849

Thorntns.....................114.500.50177.501126.013.447

UtdDrug......................263.75xd3.50274.86207.831.522.1112

FT

Source: Financial Times, 18 May 2006

l	Unlike bonds, the share price tables show the volume (in 000s) of shares actually traded during the previous day’s session (see the nal column). The entry for Tesco shows a turnover of nearly 88m shares.

The Financial Times’s London Share Service provides vital information about the

shares of individual companies and also, therefore, about shares as a whole. If we

wanted to know about the behaviour of share prices in general, because we were

making a choice between investing in shares and investing in bonds, for example,

we could scan the columns and see how shares as a whole were performing. However,

this is neither convenient nor very accurate. A quick scan might tell us that share

prices generally rose yesterday, but how could we tell by how much? In order to provide

a general but fairly accurate view of how the market is behaving, the Financial Times

(often in association with the Institute of Actuaries) publishes a number of share

price indices.

The best known index of general share price movements in the UK is the Financial

Times-Stock Exchange 100 Share Index or ‘Footsie’ for short. The 100 companies which

make up the index are roughly the 100 largest rms, by capitalisation, in the UK.

The capitalisation of a company is found by multiplying the number of shares in issue

by their market price. We say ‘roughly’ because a rm will not be included, however

large it is, if its shares never change hands or if it is expected that no dividend

will be paid. Capitalisation depends partly on the price of shares, and these prices

uctuate: it follows that the 100 largest companies will change from time to time.

The constituents of the Footsie are revised every quarter, though to avoid adding and

removing the same rms every three months, as they hover around the critical value,

the index committee employs a lter. The composition of the index will not normally

change until a ‘new’ rm rises to 90th in the size ranking anda rm currently in the

index drops to 110th in the list.

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