U.S. Treasury bonds

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. 

Some bonds offer special tax advantages. There is no state or local income tax on the interest from U.S. Treasury bonds. There is no federal income tax on the interest from most municipal bonds, and in many cases no state or local income tax, either. Do you want income that is taxable or income that is tax-exempt The answer depends on your income tax bracket—and the difference between what can be earned from taxable versus tax-exempt securities—not only presently, but also throughout the period until your bonds mature. The decision about whether to invest in a taxable bond or a tax-exempt bond can also depend on whether you will be holding the securities in an account that is already tax-preferred or tax-deferred, such as a pension account,... 

Treasury bond A negotiable, coupon-bearing debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of more than seven years. Interest is paid semiannually. Exempt from state and local taxes. Also called U.S. Treasury bond. 

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. 

Interest rate risk affects investments such as preferred stocks, utility stocks, bonds and U.S. Treasury securities. To minimize exposure, concentrate on top quality investments and hold until maturity. 

To illustrate the essence of the asset-allocation problem, 1 begin with a simple example theit includes the following assets U.S. stocks, intemationeil stocks, U.S. bonds, international bonds, and cash. This constitutes a broad asset mix typical of that used by many professional managers. Expected returns are 11.0%, 12.6%, 6.0%, 6.9%, and 5.0%, respectively. The expected standard deviations (risk) of these returns are 12.5%, 14.7%, 4.3%, 7.8%, and 0.0%. Note that the standard deviation of cash returns is zero because this asset is presumed to consist of riskless U.S. Treasury securities. The correlation matrix for asset returns is ... 

A U.S. Treasury paying semiannual coupons, with a maturity of ten years, has a quoted yield of 4.89 percent. A European government bond with a similar maturity is quoted at a yield of 4.96 percent. Which bond has the higher yield to maturity in practice ... 

Certain classes of bonds—U.S. Treasuries and Eurobonds, for example —do not have ex-dividend periods and therefore trade cum dividend right... 

As discussed in chapter 1, there are two types of fixed-income securities zero-coupon bonds, also known as discount bonds or strips, and coupon bonds. A zero-coupon bond makes a single payment on its maturity date, while a coupon bond makes interest payments at regular dates up to and including its maturity date. A coupon bond may be regarded as a set of strips, with the payment on each coupon date and at maturity being equivalent to a zeto-coupon bond maturing on that date. This equivalence is not purely academic. Before the advent of the formal market in U.S. Treasury strips, a number of investment banks traded the cash flows of Treasury securities as separate zero-coupon securities. 

Credit default swaps can be used to trade credit spreads. Say investors believe the credit spread between certain emerging-market government bonds and U.S. Treasuries is going to widen. The simplest way to exploit... 

Notes issued in synthetic structures are organized by tranche. With the proceeds from the notes it issues to investors, the SPV purchases high-quality (AAA) liquid securities—for example, U.S. Treasuries, bank asset-backed paper such as credit card ABS, and German bonds, such as Pfandbriefe —to serve as collateral. This collateral will generate LIBOR-related interest and principal cash flows that the SPV passes on to the investors together with the swap premium, which creates an additional credit spread on the notes. The cash flows from the collateral may not match the payments due on the issued notes—for example, the bonds used as collateral may pay a flxed rate and the issued notes a floating one. To remedy this, the... 

Yield has been defined in previous chapters as the discount rate that equates the sum of the present values of all a bonds cash flows to its observed market price. A vanilla bond, such as a U.S. Treasury, has m future cash flows—the coupon payments—each having a value C, equal to one-half the coupon rate applied to the face value. C , is the principal payment. The sum total of the bond s discounted cash flows is given by equation... 

U.S. Treasury price quotes are in ticks, or thirty-seconds of a price point. A half tick is denoted by a plus sign. On May 10, 1994, the 10.25 percent Treasury bond maturing July 21, 1995, was quoted at 104-28+— in other words, an investor would pay 104.28625 for every 100 in face value. It pays coupons on January 21 and July 21. On May 11, 1994, the settlement date, it will have accrued 109 days of interest, for a total of 10.25 X 109/365 x 0.5, or 1.53048 for every 100 of face value. The dirty price of the bond on this date is thus 104-28+ plus 1.53048, or 106.421105. 

Different markets have different setdement conventions. U.S. Treasuries, for example, normally settle on T -I- 1 one business day after the trade date T. Eurobonds, on the other hand, settle on T -1-3. The term value date is sometimes used in place of settlement date however, the two terms are not strictly synonymous. A settlement date can fall only on a business day a bond traded on a Friday, therefore, will settle on a Monday. A value date, in contrast, can sometimes fall on a non-business day—when accrued interest is being calculated, for example. 

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