Definition of bond points
Bond points refer to the fact that unlike our system for quoting prices on stocks, price quotations on bonds are in the form of a secret code. For example, if a stock is quoted as trading at 80, then this means $80 per share. So, if I wanted to buy 100 shares, I would have to pay $8,000 plus commission. Bonds are quoted in terms of bond points. Technically, a point is 1 per cent per $100 of par value. In practice, one can simply think of a price quoted in bond points as being a percentage of par value. Thus, a bond that trades at 80 is trading at 80 per cent of par value. Most bonds have a par value of $1,000. Hence, a bond trading at 80 would be trading at a price of $800 per bond.
To further complicate matters, with US government bonds, fractional points are in quoted in terms of 32nds. For example, at the time of writing, the Treasury bond with a 3 1/8 coupon rate that matures in February 2042 is quoted as 100:06 bid and 100:08 ask. The bid price is what one would receive from a dealer if the investor was attempting to sell his or her bonds, and the ask price is what the investor would have to pay to buy these same bonds. Hence, the purchase price is 100 8/32% of par, which translates into 100.25%. For a $1,000 par value bond, the investor would have to pay $1,002.50 for the bond itself.