Fixed Income Test 2 (Answerd) Verified
Solution
Two factors account for prominence of US Treasuries
1) Volume
2) Liquidity
Department of Treasury = largest global single issuer of debt. Most active/liquid market
in the world.
All Treausury securities
are noncallable. Thus, investors are not subject to call risk
Marketable Treasury secs
fixed-principal securities or inflation-indexed securities
Treasury Bills
- issued at discount
- no coupon
- one year or less
- return to the investor = the difference between the maturity value and purchase price
Treasury notes
- pay coupons
- 1 to 10 years
Treasury bonds
- pay coupons
- Greater than 10 years
Fixed-Rate vs. Floating-Rate
Fixed-Rate: pays interest semiannually
Floating-Rate: makes quarterly payments
TIPS
Treasury Inflation Protection Securities
- both the coupon payment and maturity are adjusted for inflation semiannually
(inflation-adjusted principal)
Treasury Auction Process
- noncompetitive bids
- lazy entity willing to purchase the sec at the yield determined by the auction process
- $ bid amount reserved at beginning
Treasury Auction Process
- competitive bid
- bidder specifies the quantity and yield sought
stop-out yield ("high yield")
, - The highest yield accepted by the Treasury
- everyone gets it
on-the-run issue ("current issue")
most recently auctioned issue
when-issued market
- when Treasury securities are traded prior to the time they are issued
Treasury bills are quoted on...
bond discount basis (not price basis)
Price Quoted on TBills Formula
Y = (D/F) * (360/t)
bond equivalent yield
- the measure that seeks to make the TBill quote comparable to Treasury notes &
bonds
- CD equivalent yield also does the same taking into consideration the price of a TBill
91-19+
19/32 + 1/64
= 91.0609375
107-222
22/32 + 2/256
= 107.6953125
109-066
6/32 + 6/256
= 109.2109375
Accrued Interest
- investor compensating the seller of a bond for the coupon interest earned from the
time of the last coupon payment to the settlement date
- number of days = days in which the investor has earned interest
trade date
date on which the transaction is executed
settlement date
transaction completed (next day)
Interest accrues...
- from the date including the previous coupon payment
- up to (but excluding) the settlement date
For Treasury coupon securities...
the actual day count convention is used
Coupon stripping (STRIPS)
Solution
Two factors account for prominence of US Treasuries
1) Volume
2) Liquidity
Department of Treasury = largest global single issuer of debt. Most active/liquid market
in the world.
All Treausury securities
are noncallable. Thus, investors are not subject to call risk
Marketable Treasury secs
fixed-principal securities or inflation-indexed securities
Treasury Bills
- issued at discount
- no coupon
- one year or less
- return to the investor = the difference between the maturity value and purchase price
Treasury notes
- pay coupons
- 1 to 10 years
Treasury bonds
- pay coupons
- Greater than 10 years
Fixed-Rate vs. Floating-Rate
Fixed-Rate: pays interest semiannually
Floating-Rate: makes quarterly payments
TIPS
Treasury Inflation Protection Securities
- both the coupon payment and maturity are adjusted for inflation semiannually
(inflation-adjusted principal)
Treasury Auction Process
- noncompetitive bids
- lazy entity willing to purchase the sec at the yield determined by the auction process
- $ bid amount reserved at beginning
Treasury Auction Process
- competitive bid
- bidder specifies the quantity and yield sought
stop-out yield ("high yield")
, - The highest yield accepted by the Treasury
- everyone gets it
on-the-run issue ("current issue")
most recently auctioned issue
when-issued market
- when Treasury securities are traded prior to the time they are issued
Treasury bills are quoted on...
bond discount basis (not price basis)
Price Quoted on TBills Formula
Y = (D/F) * (360/t)
bond equivalent yield
- the measure that seeks to make the TBill quote comparable to Treasury notes &
bonds
- CD equivalent yield also does the same taking into consideration the price of a TBill
91-19+
19/32 + 1/64
= 91.0609375
107-222
22/32 + 2/256
= 107.6953125
109-066
6/32 + 6/256
= 109.2109375
Accrued Interest
- investor compensating the seller of a bond for the coupon interest earned from the
time of the last coupon payment to the settlement date
- number of days = days in which the investor has earned interest
trade date
date on which the transaction is executed
settlement date
transaction completed (next day)
Interest accrues...
- from the date including the previous coupon payment
- up to (but excluding) the settlement date
For Treasury coupon securities...
the actual day count convention is used
Coupon stripping (STRIPS)
