Lecture_01 - 1 Traded Securities This chapter provides the institutional background on the financial securities studied in this book The

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1 1 Traded Securities This chapter provides the institutional background on the financial securities studied in this book. The presentation of the institutional material in this chapter is brief.
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2 A Treasury Securities United States Treasury securities (bonds, notes, and bills) are debt obligations issued by the U.S. government, and their payment (coupons plus principal) is guaranteed by the taxing authority of the United States. They are considered to be default free. Treasury securities are issued in two basic types: (i) coupon-bearing instruments paying interest every six months with a principal amount (or face value) paid at maturity, called coupon bonds , and (ii) discount securities bearing no coupons and paying only a principal amount at maturity, called zero-coupon bonds . By historic convention, the Treasury issues all securities with maturities of one year or less as zero-coupon bonds, and all securities with maturities greater than a year as coupon bearing bonds.
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3 The zero-coupon Treasury securities are called bills . The coupon bearing Treasury securities are called notes or bonds depending upon whether the maturity at issuance is from 2 to 10 years or greater than 10 years, respectively. Treasury bonds issued prior to February 1985 are callable by the Treasury Department anytime within the last five years of the bond's life. This call provision reduces the value of the bond to its owner.
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4 Figure 1.1
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5 Figure 1.1 (continued)
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6 Callable Treasury bonds are indicated by a five-year span in the maturity date. Treasury securities called STRIPS (separate trading of registered interest and principal of securities). STRIPS are issued by the Federal Reserve. They are synthetically created zero-coupon bonds. Under U.S. Treasury STRIPS, the second column is the type of payment: coupon interest (ci), note principal (np), or bond principal (bp). New Treasury securities are issued in an auction market on a regular basis. The auction uses competitive bids, although noncompetitive bids are accepted and tendered at the average yield of the competitive bids. The auction market is called the primary market .
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7 Figure 1.1 corresponds to Treasury prices in the secondary market . The Treasury auction mechanism is, in fact, an important component in the determination of secondary market Treasury security prices.
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8 Those Treasury security issues of a particular time to maturity (3 months, 6 months, 1 year, 2 years, 3 years, 5 years, 7 years, 10 years and 30 years) that are the most recently auctioned are called on-the- run . Those Treasury security issues with similar maturities, but that were offered in previous auctions, are called off-the-run .
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9 B Treasury Security Markets The majority of Treasury securities are traded in the over-the-counter market (the New York Stock Exchange lists some issues, but the trading volume is small.) An over-the-counter market is a “screen based” or “phone based” market between investment banks, commercial banks, and government bond
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This note was uploaded on 12/09/2008 for the course NBA 5550 taught by Professor Jarrow,robert during the Fall '08 term at Cornell University (Engineering School).

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Lecture_01 - 1 Traded Securities This chapter provides the institutional background on the financial securities studied in this book The

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