Unformatted text preview:

19Learning ObjectivesGovernment BondsGovernment Bond Basics, I.Government Bond Basics, II.U.S. Treasury Bills (T-bills)U.S. Treasury Notes (T-notes)U.S. Treasury Bonds (T-bonds)U.S. Treasury STRIPSExample: Calculating the Price of a STRIPSZero Coupon Bond Prices by Yield to Maturity and MaturityZero Coupon Bond PricesWSJ Prices for Treasury Bonds, Notes and BillsTreasury Bond and Note PricesStraight Bond Prices and Yield to MaturityTreasury Bond Prices and YTM for Different MaturitiesInflation-Indexed Treasury Securities, I.Inflation-Indexed Treasury Securities, II.U.S. Treasury, General Auction PatternU.S. Treasury Auctions, DetailsU.S. Treasury Auctions, More DetailsU.S. Savings Bonds, I.U.S. Savings Bonds, II.Federal Government Agency SecuritiesSlide 25Slide 26Municipal BondsSlide 28Slide 29Municipal Bond FeaturesMunicipal Bond QuotesTypes of Municipal BondsMunicipal Bond Credit RatingsMunicipal Bond InsuranceEquivalent Taxable YieldExample: Equivalent Taxable YieldExample: Critical Marginal Tax RateTaxable Municipal BondsUseful WebsitesChapter Review, I.Chapter Review, II.ChapterMcGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.19Government Bonds19-2Learning ObjectivesBefore you loan money to Uncle Sam (and his relatives), you should know:1. The basics of U.S. Treasury securities and how they are sold.2. The workings of the STRIPS program and pricing Treasury bonds. 3. How federal agencies borrow money. 4. How municipalities borrow money.19-3Government Bonds•Our goal in this chapter is to examine the securities issued by federal, state, and local governments.•Together, these securities represent more than $6 trillion of outstanding debt.19-4Government Bond Basics, I.•In 2007, the gross public debt of the U.S. government was more than $5 trillion, making it the largest single borrower in the world.•The U.S. Treasury finances government debt by issuing marketable as well as non-marketable securities.•Municipal government debt is also a large debt market. –In the U.S., there are more than 85,000 state and local governments.–Together, they contribute about $2 trillion of outstanding debt.19-5Government Bond Basics, II.•Marketable securities can be traded among investors.•Marketable securities issued by the U.S. Government include T-bills, T-notes, and T-bonds. •Non-marketable securities must be redeemed by the issuer.•Non-marketable securities include U.S. Savings Bonds, Government Account Series, and State and Local Government Series.19-6U.S. Treasury Bills (T-bills)•T-bills are Short-term obligations with maturities of 13, 26, or 52 weeks (when issued).•T-bills pay only their face value (or redemption value) at maturity.•Face value denominations for T-bills are as small as $1,000.•T-bills are sold on a discount basis (the discount represents the imputed interest on the bill).19-7U.S. Treasury Notes (T-notes)•T-notes are medium-term obligations, usually with maturities of 2, 5, or 10 years (when issued). •T-notes pay semiannual coupons (at a fixed coupon rate) in addition to their face value (at maturity).•T-notes have face value denominations as small as $1,000.19-8U.S. Treasury Bonds (T-bonds)•T-bonds are long-term obligations with maturities of more than 10 years (when issued).•T-bonds pay semiannual coupons (at a fixed coupon rate) in addition to their face value (at maturity).•T-bonds have face value denominations as small as $1,000.19-9U.S. Treasury STRIPS•STRIPS: Separate Trading of Registered Interest and Principal of Securities•STRIPS were originally derived from 10-year T-notes and 30-year T-bonds –A 30-year T-bond can be separated into 61 strips - 60 semiannual coupons + a single face value payment•STRIPS are effectively zero coupon bonds (zeroes).•The YTM of a STRIP is the interest rates the investors will receive if the STRIP is held until maturity.19-10Example: Calculating the Price of a STRIPS•What is the price of a STRIPS maturing in 20 years with a face value of $10,000 and a semiannual YTM of 7.5%?•The STRIPS price is calculated as the present value of a single cash flow. That is, $2,293.38.075/21$10,000PRICE STRIPS4019-11Zero Coupon Bond Prices by Yield to Maturity and Maturity19-12Zero Coupon Bond Prices19-13WSJ Prices for Treasury Bonds, Notes and Bills19-14Treasury Bond and Note Prices•When a callable T-bond has a price above par, the reported yield is a yield to call (YTC). Since 1985 however, the Treasury has issued only non-callable bonds.•Because T-bonds and notes pay semiannual coupons, bond yields are stated on a semiannual basis.•The relationship between the price of a note or bond and its YTM was discussed in a previous Chapter (Bond Prices and Yields).19-15Straight Bond Prices and Yield to Maturity•Recall: The price of a bond is found by adding together the present value of the bond’s coupon payments and the present value of the bond’s face value. •The formula is:•In the formula, C represents the annual coupon payments (in $), FV is the face value of the bond (in $), and M is the maturity of the bond, measured in years.   2M2M2YTM1FV2YTM111YTMCPriceBond19-16Treasury Bond Prices and YTMfor Different Maturities19-17Inflation-Indexed Treasury Securities, I.•In recent years, the U.S. Treasury has issued securities that guarantee a fixed rate of return in excess of realized inflation rates.•These inflation-indexed U.S. Treasury securities:–Pay a fixed coupon rate on their current principal, and –Adjust their principal semiannually according to the most recent inflation rate19-18Inflation-Indexed Treasury Securities, II.19-19U.S. Treasury, General Auction Pattern•The Federal Reserve Bank conducts regularly scheduled auctions for T-bills, notes, and bonds.•4-week, 13-week, and 26-week T-bills are auctioned weekly.•2-year T-notes are auctioned monthly.•5-year and 10-year T-note auctions occur about four times per year for each maturity.•The U.S. Treasury posts auction FAQs, results, and other details at: www.treasurydirect.gov19-20U.S. Treasury Auctions, Details•At each Treasury auction, the Federal Reserve accepts sealed bids of two types.Competitive bids specify a bid price/yield and a bid quantity. Such bids can only be submitted by Treasury securities dealers.Noncompetitive bids specify only a bid quantity, and may be submitted by


View Full Document

UNCW FIN 330 - Government Bonds

Download Government Bonds
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Government Bonds and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Government Bonds 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?