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I'm not a quant practitioner, but a student so this may be a very simple question.

I was of the understanding corporate US bonds were quoted 1/8 increments and US treasuries in 1/32 increments. Such that a quote of 99 1/8 represents 99.125%.

I came across some study notes, from a fairly reputable source that equated a Nominal 3 5/8 bond to a yield of 3.275% (but 5/8 = 0.625) and a TIPS which was quoted as 1 7/8 to a yield of 1.237% (7/8 = .875)

... am I missing something?

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Your confusion is certainly coming from a distinction between Price and Yield.

1 - You're definitely right in regards to Bond Price as 99 1/8 = 99.125. Likewise 99 1/32 = 99.0313 (assuming 100 PAR). It's worth highlighting on the fact that this convention is only applicable to US bond prices, as far as I am concerned.

2 - By contrast, Bond Yield is the discount rate at which the present value of all future cash flows from the bond (coupons and principal included) is equal to its price (see the below).

enter image description here

Where:

 P = Bond price (Clean)
 C = Coupon payments, derived from Coupon frequency as well as Coupon Rate
 F = Face value of the bond
 t = Time to maturity
  • For simplicity purposes, let's assume a flat term structure of interest rates, thus r is constant.

  • Refer to Excel YIELD() or Matlab YLDMAT() functions to sort r out from the above equation (excluding day count convention for simplicity purposes.)

Hope it helps

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US bond prices are routinely quoted at much finer intervals. For example, you may see a quote of 99-103, which translates into $99+10/32 + 3/256$.

Further, although there may be a minimum tick size for "prices," so such constraints are imposed on "yields" (at least in the US). In fact, yields are frequently computed up to 15-20 decimal places.

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