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Unformatted text preview: Chapter 2, 3, 4, 5 Study Guide Different types of Treasury securities and their features- T-bills- short term debt obligations of US treasury, sold at a discount & maturing in less than 365 days. Issued at a discount to par value, have no coupon rate & mature at a par value. No default risk, very nominal interest rate risk because short term & high degree of liquidity, computed on bank discount basis Yd=D/F *360/t. Bids are competitive & noncompetitive basis, purchase directly via Internet (Treasury direct). 3-6 mos, 13 &26 weeks bills offered weekly (on Mon). Treasury Notes- coupon paying obligations of the US treasury. Time to maturity at issue is two, three, four, five, or ten year. 2 & 5 year notes issued monthly last day of each month. Treasury Bonds- coupon paying obligations of the US treasury. Time to maturity at issue greater than 10 years at 15 & 30 years. Treasury Inflation Protected Secruities (TIPS)- coupon paying obligations of US treasury that provide a cash flow stream adjusted for actual inflation, T notes & bonds. Adjusted for inflation. Coupon payment is fixed but principal value is adjusted for actual inflationg, amount of adjustment is treated as taxable income. How and why the Treasury auction process works- Sold in primary market on basis of Dutch auction or single price auction. Buy T-securities by submitting non-competitive bid (specify amount of security willing to purchase but at the yield determined by the auction process) & competitive bid (specify both the quantity sought & the yield at which you are willing to purchase the auctioned security) usually institution and government bond dealers. Dutch auctions- competitive bids (w/ quantities) are arranged highest to lowest price. Highest yield that clears the entire supply is identified as stop-out yield. All bidders at and below the stop-out yield receive the issue at the stop-out yield. Bidders whos bids are higher than the stop-out yield are not distributed any of the new issue. when-issued market- treasury securities are traded prior to the time they are issued by the treasury. WI market for both bills and coupon securities extends from the day the auction is announced until the issue day. Price quotes and accrued interest for Treasury, corporate and municipal securities- T-bills- on bank discount basis, Yd= D/F *360/t T-coupon on a price basis in where pts where one pt equals 1% of par in unites of 32nds so price of 96-14 equals 96 & 14/32 or 96.4375 per 100 of par value. 96-14 + equals 96 plus 14/32nds plus 1/64. 96-142 equals 96 plus 14/32 plus 2/256. Accrued interest- when an investor purchases a bond between coupon payments, if the issuer is not in default, the buyer must compensate the seller of the bond for the coupon interest earned from the time the last coupon payment to the settlement date of the bond. AI= annual dollar coupon/2 * days in AI/days in coupon....
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- Spring '10