After all the federal government has the power to tax

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Unformatted text preview: ime to maturity. Although called by different names, all are bonds. Treasury bills mature in 13, 26, or 52 weeks. Treasury notes mature in 2 to 10 years, and Treasury bonds mature in 10 to 30 years. Treasury bills, notes, and bonds are considered safe investments because it is unlikely that the federal government will default on its bond obligations. After all, the federal government has the power to tax to pay off bondholders. Inflation-Indexed Treasury Bonds In 1997, the federal government began to issue inflation-indexed bonds. The first indexed bonds issued matured in 10 years and were available at face values as small as $1,000. The difference between an inflationindexed Treasury bond and a Treasury bond that is not indexed is that an inflationindexed Treasury bond guarantees the purchaser a certain real rate of return, but a nonindexed Treasury bond does not. For example, suppose you purchase an inflation-indexed, 10-year, $1,000 bond that pays 4 percent coupon rate. If no inflation occurs, the annual interest payment will be $40. On the other hand, if the inflation rate is, say, 3 percent, the government will “mark up” the value of the bond by 3 percent— from $1,000 to $1,030. Then it will pay 4 percent on this higher dollar amount. So instead of paying $40 each year, it pays $41.20. By increasing the monetary value of the security by the rate of inflation, the government guarantees the bondholder a real return of 4 percent. 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 447 How to Read the Bond Market Page If you turn to the bond market page of the newspaper, you can find information about the different types of bonds. If you want to invest in bonds, you will need to know how to read the information that relates to both corporate bonds and Treasury bonds. First let’s look at corporate bonds. Corporate Bonds Not all publications will present corporate bond information in exactly the same format. The format we show you here is most common. (1) (2) (3) (4) (...
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This document was uploaded on 01/16/2014.

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