The bid price of the August 05 bond is quoted as 127:20 which means 127 20/32 of par value. (Recall that par value is the lump sum paid at maturity.) If par is $1,000 (which is standard), then this quote results in a price of $1,276.25. Because 20/32 = 0.625, the price is 127.625% of par. Because the par value is $1,000, we get (127.625/100) $1,000 = $1276.25 today and get only $1,000 in the future. We do not lose money, because we also receive coupon payments every semiannual period up to the maturity date. The notation 02-07 for the February 7 5/8 ‘s bond means that the bond is first callable in 2002, and it matures in February 2007. A callable bond can be bought back by the issuing entity at a stated price in the future. The change (Chg.) column is in 32nds. Hence, the 7 5/8, Feb 02-07 rise 1/32 from the previous day.

        Government agencies, such as the Federal National Mortgage Association (FNMA – pronounced “Fannie Mae”), issue federal agency bonds. They are usually in $100,000 denominations. The 6.82% FNMA issue pays a coupon rate of 6.82% and has a stated maturity of April 2002 (4-02). The bid price is 102.5% (or 102 and 16/32nds) of par, and the asked price is 102.625% (or 102 and 20/32 nds) of par. At these prices, the internal rate of return is 6.15%

        Agency securities differ from Treasury securities. Agency securities are issued by federal government-sponsored corporations, such as the Federal Home Loan Banks, and not directly from the U.S. government. Agency securities are perceived to be slightly more risky than Treasuries from a default risk viewpoint. The U.S. government may not be a likely to come to the rescue of an agency as it would be for securities issued by the U.S. Treasury

        State and local governments issue municipal bonds to finance highways, water systems, schools, and other capital projects. There are two basic types of municipal bonds ; general obligation bonds and revenue bonds, General obligation bonds are backed by the full faith and power of the municipality. Revenue bonds are backed by the income generated from a specific project, such as a toll bridge. The income from these bonds is exempt from federal, state, and local taxes if the investor lives in that locality but the income is subject to state and local taxes if the investor does not live in the locality issuing the bonds. Because investors are interested in after-tax returns, we would not anticipate the yields to be as high as the fully taxable counterparts. Everything else being equal, investor would prefer a tax-free bond.