U.S. Treasury bills

Interest rate provided by U.S. Treasury bills, notes, and bonds at different dates. 

Cash Reserves. This includes funds that are readily available in checking accounts, money market accounts, certificates of deposit of one year or less, U.S. Government Series EE and HH bonds, and U.S. Treasury bills. 

For risk-free investments, such as U.S. Treasury bills, the required return (as a percent of the capital invested) is determined by supply and demand in the money markets. If the going risk-free interest rate is 5 percent per year, for example, an investor who puts up 100 expects to get at least 105 back next year. From another point of view, 100 promised for delivery next year is worth only 95.23 today, because the investor could take that 95.23, invest it in a risk-free security, and have the 100 a year hence. Not having access to the 95.23 today essentially deprives the investor of the opportunity to invest at the going interest rate. 

This principle lies behind the payment of interest on safe investments like insured bank deposits or U.S. Treasury bills. 

Risk is the third component of the R D investment. Riskier investments require higher dollar returns otherwise investors would put their money in safe investments like U.S. Treasury bills. Thus, the opportunity cost of capital for R D investments must be higher than the cost of capital for risk-free investments. And, the present value of 100 that is expected next year but with a great deal of uncertainty is even lower than the present value of a risk-free investment. How much higher the opportunity cost of capital for an R D investment is, and how much lower the present value of future expected returns is, depends on the riskiness of the R D investment. 

Investors in pharmaceutical research and development (R D) put up their money because they expect, on average, to get returns that adequately compensate them for the time and risk involved. Just as the interest rate on bank deposits is a payment for the use of depositors money (or capital), the return on an investment in R D is a payment the company or its investors get from the use of their capital. Riskier investments require higher dollar returns otherwise, investors would put their money in safe investments like U.S. Treasury bills or bank certificates of deposit. The riskier the investment, the higher the required return. The rate of return that investors must be able to expect from money invested with a given level of risk is referred to as the investment s cost of capital. ... 

How does one measure the riskiness of an investment This is the key question in estimating the cost of capital for any project. Were there no risk the cost of capital would be the same as the interest rate on U. S. Treasury bills. 

The value of the risk-free rate of return, r, can be estimated as being equal to the interest rate paid on U.S. Treasury Bills or other guaranteed savings instruments, approximately 6% in mid-20(X). The interest rate equivalent to the general equity market, was found to be approximately 9% by Fisher and Lorie (1968). Over the past 30 years this figure has risen to 11%. The effective tax rate, t, can... 

Public Debt Online is at http //www.publicdebt.treas.gov. That s right, this is a. gov site—perhaps the only one that is mentioned in this book that offers transactions. On this site, you can buy, direct from Uncle Sam, U.S. savings bonds (remember them ) as well as U.S. Treasury bills, notes, and bonds. (See Figure 9.2.)... 

Treasury bill A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of one year or less. Exempt from state and local taxes. Also called bill, T-bill, or U.S. Treasury bill. 

In an unrelated study, Stewart estimated the market risk premium by comparing Standard and Poor s 500 stocks with long-term (20-year) U.S. Treasury bonds from 1925 to 1989 (409). He found that the risk premium was only 5.8 percent over the period. This would imply a risk premium over the Treasury bill rate (adjusted for long-term forecasts) of just 7.0 percent. 

The U.S. Treasury interest basis is semiannual, and the market uses an actual/actual day count. So, the value of n for the 90-day T-bill whose yield analysis as of March 25, 2004, is shown in figure 16.1 would be 90/183, where 183 represents the number of days in half a year, given that 2004, as a leap year, had 366 days. The bill was priced... 

OTA had two sources of evidence on pharmaceutical betas. First, as described earlier, Myers and Shyam-Sunder estimated market value-weighted equity betas for a sample of 17 large U.S. pharmaceutical firms by regressing excess returns (over the Treasury bill rate) against excess returns on Standard and Poor s 500 composite index for 60-month periods ending in December 1979 December 1984 and December 1989. Estimated betas were 0.97, 0.66, and 0.98 respectively (285). 

Treasury notes have maturities of between 2 and 10 years. Because of their longer maturities, these notes have more interest rate risk associated with them and so their prices fluctuate more than T-bill prices. The U.S. government used to issue Treasury bonds, which carried maturities of 15, 20, and 30 years. The 30-year Treasury bond was just retired in November 2001. Another Treasury security is a "strip" or zero-coupon Treasury security created by separating the income streams of coupon payments and principal, wherein the holder receives no coupon payments, buys the bond at a discount, and is returned the principal at par. There is a high degree of volatility associated with strips. 

The U.S. government offers bills, notes, and bonds to the public through regularly scheduled auctions. The Treasury announces the size of the offering in a press release about a week before the auction, and the news usually appears in all of the financial publications and news broadcasts. If you use the Public Debt web site, you will be informed of the auctions at the time the news release goes out. 

Incidentally, fixed-income securities issued by the federal government such as Treasury bills, notes, and bonds are not rated. Since these bonds are backed by the full faith and credit of the U.S. government, they are considered to be relatively free of default risk. Municipal bonds, however, such as those issued by a city or a state or other local authority, many times are rated, since the finances of local governments can and do change. 

But first, you should know what types of bonds are available. Among the types of bonds you can choose from are U.S. government securities, municipal bonds, corporate bonds, mortgage and asset-backed securities, federal agency securities and foreign government bonds. There are also many short-maturity options such as Treasury bills, bank certificates of deposit and commercial paper. 

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