HOFIS Ch7 Flashcards
Describe the 4 different types of securities issued by the U.S. Treasury
- Discount securities (no coupons)
T-bills have a maturity ¤ 1 year - Coupon securities
“Notes” have 2–10 year maturities
“Bonds” have maturities ¡ 10 years - Treasury Inflation-Protected Securities (TIPS)
Principal is inflation-adjusted by CPI
Coupons = fixed % of inflation-adjusted principal - Floating rate notes (FRNs) (newest form debuting in 2014)
2-year, fixed-principal notes that pay floating interest quarterly
Floating rate is based on 13-week T-bills
Treasury notes account for the majority outstanding (60%)
Describe the primary market auction process
Sold through sealed-bid, single-price auctions
Open to primary and non-primary dealers
Primary dealers interact directly with the NY Fed
Treasury accepts competitive bids from lowest to highest yield
Stops accepting when total issue (less noncompetitive bids) gets filled
Stop-out yield – highest yield accepted
Auctions are held on regular, predictable schedules
Treasury also exercises reopenings and buybacks
Reopening – additional offering of a security that is already outstanding
Buyback – when the Treasury buys outstanding Treasuries in the secondary market
Describe the quoting convention for Treasury Bills
T-bills are quoted on a discount rate basis:
Yd
F P
F
360
t
F = face value, P = price, and t = days until maturity
List 2 differences between how Treasury Bills are quoted and standard return
measurements
Differs from standard return measures in two ways:
1. Compares dollar return with face value instead of price
2. Annualized using a 360-day year instead of 365
Describe how “Zeros” and “Strips” are created
Created by stripping coupons and principal from issued Treasury securities
Not issued directly by the Treasury
STRIPS – Separate Trading of Registered Interest and Principal Securities
Created by the Treasury in 1985 to improve liquidity of strips
Allows strips to be registered separately with the Federal Government
