FIN4014 Fixed Income Guo T2

FIN4014 Fixed Income Guo T2 - FIN4014 Fixed Income Topic2:...

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FIN4014 Fixed Income Topic 2: Treasury Securities and Term Structure of Interest Rates Instructor: Hui Guo 9/9/2016 1 Hui Guo FIN4014 Fixed Income
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Treasury Securities 9/9/2016 2 Hui Guo FIN4014 Fixed Income
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3 9/9/2016 Hui Guo FIN4014 Fixed Income Treasury securities Issued by U.S. Department of the Treasury Federal government borrows to finance federal deficits Safest assets with no or low credit risk backed by the full faith and credit of U.S. government Play an important role in the capital market largest sector of the bond market Large volume makes Treasury market the most active and liquid Treasury securities provide benchmark interest rates
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4 9/9/2016 Hui Guo FIN4014 Fixed Income Treasury securities: benchmark interest rates 0.00 5.00 10.00 15.00 20.00 1 Apr 71 1 Apr 76 1 Apr 81 1 Apr 86 1 Apr 91 1 Apr 96 1 Apr 01 1 Apr 06 1 Apr 11 AAA Baa Mortgate30 TB10
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5 9/9/2016 Hui Guo FIN4014 Fixed Income Types of Treasury Securities Discount Securities Issued at a discount to par value, no coupon payments, mature at par value The return is the difference between par value and purchase price. Example: with 3-m maturity and $100 par value, a Treasury bill is sold at $96 Securities with maturities of 1 year or less are issued as discount securities Coupon Securities are issued with a stated rate of interest, coupon interest every 6 months, and are redeemed at par value at maturity are issued at a price close to par value, the return is primarily the coupon payments received through the security’s life Example: a 20-year 6% Treasury Bond is sold at the par of $100 Securities with maturities of 2 years or more are issued as coupon securities
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6 9/9/2016 Hui Guo FIN4014 Fixed Income Types of Treasury Securities Issue Type Range of Initial Maturity Initial Maturities Security Type Treasury Bills M 1y Cash-management 4w, 13w, 26w No Coupon Treasury Notes 1y<M 10y 2y, 3y, 5y, 10y Coupon Treasury Bonds M>10y 20y, 30y Coupon Treasury inflation protection securities 5y, 10y, 30y Coupon
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