FI final notes

FI final notes - CH 6 Treasury and Agency Securities...

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CH 6 – Treasury and Agency Securities  23:36 Treasury Securities   – interest income sub to fed but not state and local inc tax Types of Treasury Securities Fixed principal treasury securities – treasury bills are issued at a disc to par. TIPS – coupon rate is fixed and determined via auction process. coupon rate is the “real rate”. Inflation index used is the CPI. Principal is adj semiann. The inflation adjusted principal is the basis for computing the coupon interest [coupon rate*infla adj princ]. The adjustment to principal is taxed and this reduces the attractiveness of TIPS. Bc of poss of deflation, the inflation adj principal at mat may be less than initial par, but TIPS are redeemable at the greater of the inflation adj princ or initial par. Treasury auction process – treasury has considerable discretion in deciding on the terms for a marketable sec. congress can impose restriction on the total amount of bonds outstanding. Treasury sec are sold in primary mrkt through sealed bid auctions. To maintain size of new issues and help manage the maturity of debt, treasury launched a debt buyback prog. Treasury redeems outstanding unmat. Treas by purchasing them in the secondary mrkt through reverse auc. Determination of the results of an auction – auction is on a competitive bid basis. 2 types of bids. 1. Noncompetitive bid – willing to purch the auctioned sec at the yield det by the auctio process. Bidder only specifies the quantity it wants, but may not exceed 5 mill. 2. Competitive bid- specifies quant and yield at which bidder is willing to purchase the sec. results are det by first deducting the total noncompetitive and nonpublic purchases from total being auctioned. Remainder is amt awarded to competitive bidders. Bids are arranged from lowest to highest yield submitted, and started from lowest, all bids accepted until amt to be dist is completely allocated. Highest bid accepted is stop out yield and is the yield/price received by all bidders whose bid was accepted – this is a single price auction. If stop out yield is some coupon rate not paid by the treasury, it will adj price and coupon so the yield offered on sec is = stop out yield. Bid to cover ratio – total amt bid by public/total amt awarded to public Secondary Market – treasury sec are traded before they are issued by the treasury in the “when-issued [wi] market”. Trading in wi market is from day auction is announced to issue day. When gov dealers trade with each other, its through interdealer brokers [intermediary]. The dealer leave firm bids and offers wit the interdealer brokers who display the highest bid and lowest offer in a network. Price
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FI final notes - CH 6 Treasury and Agency Securities...

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