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Present at On on Govt_Bonds

Present at On on Govt_Bonds

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Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin
18
Government Bonds
18-2
Government Bonds
‡ Our goal in this chapter is to examine the securities
issued by federal, state, and local governments.
‡ Together, these securities represent more than $6
trillion of outstanding debt.
18-3
Government Bond Basics, II.
‡ Marketable securities can be traded among investors.
‡ Marketable securities issued by the U.S. Government
include T-bills, T-notes, and T-bonds.
‡ Non-marketable securities must be redeemed by the
issuer.
‡ Non-marketable securities include U.S. Savings Bonds,
Government Account Series, and State and Local
Government Series.
18-4
U.S. Treasury Bills (T-bills)
‡ T-bills are Short-term obligations with maturities of 13,
26, or 52 weeks (when issued).
‡ T-bills pay only their face value (or redemption value) at
maturity.
‡ Face value denominations for T-bills are as small as
$1,000.
‡ T-bills are sold on a discount basis (the discount
represents the imputed interest on the bill).
18-5
U.S. Treasury Notes (T-notes)
‡ T-notes are medium-term obligations, usually with
maturities of 2, 5, or 10 years (when issued).
‡ T-notes pay semiannual coupons (at a fixed coupon
rate) in addition to their face value (at maturity).
‡ T-notes have face value denominations as small as
$1,000.
18-6
U.S. Treasury Bonds (T-bonds)
‡ T-bonds are long-term obligations with maturities of
more than 10 years (when issued).
‡ T-bonds pay semiannual coupons (at a fixed coupon
rate) in addition to their face value (at maturity).
‡ T-bonds have face value denominations as small as
$1,000.
18-7
Zero Coupon Bond Prices by Yield
to Maturity and Maturity
18-8
Zero Coupon Bond Prices
18-9
WSJ Prices for Treasury Bonds,
Notes and Bills
18-10
Straight Bond Prices and Yield to Maturity
‡ Recall: The price of a bond is found by adding together the
present value of the bond¶s coupon payments and the present
value of the bond¶s face value.
‡ The formula is:
‡ In the formula, C represents the annual coupon payments (in $),
FV is the face value of the bond (in $), and M is the maturity of the
bond, measured in years.
´ ) ´ )
2M 2M
2
YTM
1
FV
2
YTM
1
1
1
YTM
C
Pric
+
+
¦
¦
¦
¦
¦

+
=
18-11
Treasury Bond Prices and YTM,
for Different Maturities
18-12
U.S. Treasury Auctions, Details
‡ At each Treasury auction, the Federal Reserve accepts
sealed bids of two types.
Competitive bids specify a bid price/yield and a bid quantity.
Such bids can only be submitted by Treasury securities dealers.
Noncompetitive bids specify only a bid quantity, and may be
submitted by individual investors.
‡ The price and yield of the issue is determined by the
results of the competitive auction process.
18-13
U.S. Savings Bonds, I.
‡ The U.S. Treasury offers an investment opportunity for
individual investors by issuing two types of Savings
Bonds:
‡ Series EE Savings Bonds:
± Have face value denominations ranging from $50 to $10,000,
± Are sold at exactly half the face value.
± Accrue interest semiannually (the interest rate is set at 90% of
the yield on newly issued 5-year T-notes), and
± Can be redeemed for the original price plus all prior accrued
interest.
18-14
U.S. Savings Bonds, II.
‡ Series I Savings Bonds:
± Have face value denominations ranging from $50 to $10,000.
± Are sold at face value.
± Accrue interest semiannually (the interest rate is set at a fixed
rate plus the recent inflation rate), and
± Can be redeemed for the original price plus all prior accrued
interest.
18-15
Federal Government Agency Securities
‡ Most U.S. government agencies consolidate their
borrowing through the Federal Financing Bank, which
obtains funds directly from the U.S. Treasury.
‡ However, several federal agencies are authorized to
issue securities directly to the public. Examples include:
± The Resolution Trust Funding Corporation
± The World Bank
± The Tennessee Valley Authority
18-16
Federal Government Agency Securities
18-17
Municipal Bonds
‡ Municipal notes and bonds, or munis, are intermediate-
to long-term interest-bearing obligations of state and
local governments, or agencies of those governments.
‡ Because their coupon interest is usually exempt from
federal income tax, the market for municipal debt is
commonly called the tax-exempt market.
18-18
Municipal Bonds
18-19
Municipal Bond Features
‡ Municipal bonds:
± Are typically callable.
± Pay semiannual coupons.
± Have a par value denomination of $5,000.
± Have prices that are stated as a percentage of par value
(though municipal bond dealers commonly use yield quotes in
their trading procedures).
± Are commonly issued with a serial maturity structure (hence the
term serial bonds, versus term bonds).
± May be putable, or have variable interest rates, or both
(variable-rate demand obligation, VRDO), and
± May be strippable (hence creating muni-strips).
18-20
Municipal Bond Quotes
18-21
Municipal Bond Credit Ratings
18-22
Useful Websites
‡ www.investinginbonds.com (lots of information on
bonds, bonds, bonds)
‡ www.ustreas.gov (visit the U.S. Treasury)
‡ www.publicdebt.treas.gov (lots of information on
Treasury securities)
‡ www.savingsbonds.com (for the latest on Savings
Bonds)
‡ www.municipalbonds.com (check out munis)
18-23
Chapter Review, I.
‡ Government Bond Basics
‡ U.S. Treasury Bills, Notes, Bonds, and STRIPS
± Treasury Bond and Note Prices
± Inflation-Indexed Treasury Securities
‡ U.S. Treasury Auctions
‡ U.S. Savings Bonds
± Series EE Savings Bonds
± Series I Savings Bonds
18-24
Chapter Review, II.
‡ Federal Government Agency Securities
‡ Municipal Bonds
± Municipal Bond Features
± Types of Municipal Bonds
± Municipal Bond Credit Ratings
± Municipal Bond Insurance
‡ Equivalent Taxable Yield
‡ Taxable Municipal Bonds

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