U.S. Treasury securities

One important assumption to keep in mind in the calculations outlined earlier is that the interest rate (discount rate) has been assumed to be constant over time even though it is not in practice. Examine Figure B.7, which shows how the interest rate for U.S. Treasury securities has changed over time for various durations of investment ranging from 3 months to 30 years (called the yield curve). 

U.S. Treasury Securities Certificates of Deposit Savings Accounts... 

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. 

First price auction. This is the common form of sealed or written bid auction, in which the highest bidder is awarded the item at a price equal to the amount bid. This procedure is thus called a sealed-bid first price auction. It is commonly used to sell off multiple units, such as short-term U.S. Treasury securities. 

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 ... 

FIGURE 10.2 Yield Curves for Active U.S. Treasury Securities and U S. Dollar Swaps on February P. POOl ... 

FIGURE 17.4 Bond Yield Calculation, Ford and U.S. Treasury Securities January 3, 2006... 

We perform a similar exercise for a U.S. Treasury security, the 214 percent February 2007 bond. This security settles on a T+1 basis, so on our trade date of January 3, 2006, its yield is as at January 4, 2006. Also, Treasury bonds accrue interest on an act/act basis. Its yield and price of4.4l 2 percent and 97.67 respectively are given at FIGURE 17.8, the Bloomberg YA page. The confirmation of these is shown at Figure 17.5 again. 

Some issuers are more creditworthy than others. When a bond issue s price is high and the yield is low, it usually means that the company or municipality has no risk of default. U.S. Treasury securities are priced very high and have a low yield precisely because of the reputation of their issuer the U.S. government. 

Because U.S. Treasury securities are considered the safest bonds to own and are free from credit risk, all other bonds, whether issued by government agencies, municipalities, or companies, are... 

However, unlike other bonds that are dependent on interest rates, such as U.S. Treasury securities, corporate bond values often reflect the health of a company and are often buoyed by the company s stock performance. Therefore, the price of a corporate bond may not fluctuate as wildly as interest rates, making it somewhat attractive to investors. 

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. 

Auctions may be for a single object or a package of nonidentical items. Alternatively, auctions may be for multiple units where many units of a homogeneous, standardized good are to be sold, such as gold bullion in the auctions conducted by the International Monetary Fund and the U.S. Treasury in the 1970s and the weekly auctioning of securities by the Treasury. 

Another area that may impact the safety function within the Social Security Act is unemployment insurance. This nationwide joint federal and state system provides unemployment benefits to protect individuals and families against the loss of income due to unemployment. This complex system is encompassed within the Social Security Act as well as the Federal Unemployment Tax Act, requiring employers to provide an unemployment tax to the state at varying rates for employees, and the state to provide the funds to the U.S. Treasury Department. The secretary of the treasury is responsible for investing the funds, and the U.S. Department of Labor is responsible for certifying the unemployment payments to the state agencies. Each state has individual unemployment compensation laws that incorporate various provisions of the Social Security Act and Federal Unemployment Tax Act. 

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. 

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... 

Spot only of derived ones.) To see how the derivation works, consider the ten hypothetical U.S. Treasuries whose maturities, prices, and yields are shown in FIGURE 16.2. Assume that the yield curve is positive and that the securities settlement date—March 1, 1999—is a coupon date, so none of them has accrued interest. 

Equation (17.7) differs from the conventional redemption yield formula in that every cash flow is discounted, not by a single rate, but by the zero-coupon rate corresponding to the maturity period of the cash flow. To apply this equation, the zero-coupon-rate term structure must be known. These rates, however, are not always readily observable. Treasury prices, on the other hand, are and can be used to derive implied spot interest rates. (Although in the market the terms are used interchangeably, from this point on, zero coupon will be used only of observable rates and spot only of derived ones.) To see how the derivation works, consider the 10 hypothetical U.S. Treasuries whose maturities, prices, and yields are shown in FIGURE 17.9. Assume that the yield curve is positive and that the securities settlement date—March 1, 1999—is a coupon date, so none of them has accrued interest. 

Part Two, Cash and Derivative Instruments and Analysis, has an analysis of various instruments including callable bonds that feature embedded options. There is a discussion of securitization and the impact on the market of the financial crisis. Other chapters cover U.S. Treasury TIPS securities, and the use and applications of credit derivatives. 

The U.S. Treasury sells four types of fixed-income securities to individual investors ... 

The site is, if anything, an experiment for the U.S. Treasury in selling securities to investors. Before the arrival of this site, the little guy went to the bank for those Series EE savings bonds, or... 

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