Treasury bonds

Examples of Treasury bonds in the following topics:

• The Common Financial Instruments

• The "Bond Yield Plus Risk Premium" Approach

  • In the BYPRP approach, we use a bond's yield to maturity, which is the discount rate at which the sum of all future cash flows from the bond (coupon payments and principal payments) are equal to the price of the bond.
  • Treasury Bond yield)
  • The dividend yield plus projected earnings growth, minus the 10-year Treasury yield
  • It can be very difficult to get an accurate estimate of the risk premium on an equity, having a duration of roughly 50 years, using a risk-free rate of such short duration as a 10-year Treasury bond.
  • Describe the process for the bond yield plus risk premium approach

• The Nature of Bonds

  • A bond is an instrument of indebtedness of the bond issuer to the holders.
  • The main categories of bonds are corporate bonds, municipal bonds, and U.S.
  • Treasury bonds, notes, and bills, which are collectively referred to simply as "Treasuries. " Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate.
  • Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
  • A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

• Default Risk and Bond Price

  • Furthermore, the U.S. government offers Treasury Bills, Treasury Notes, and Treasury Bonds that range in maturity from 15 days to 30 years.
  • We draw the supply and demand for two markets: government bond market and corporate bond market.
  • Some investors demand fewer corporate bonds and invest more in government bonds.
  • Thus, the demand for corporate bonds falls while the demand for government bonds rise because the investors consider the government bonds default-free.
  • Did you notice the government bonds have a higher bond price while corporate bonds have a lower bond price?

• Financing the War

  • As the U.S. entered WWII, Secretary of the Treasury Henry Morgenthau began planning a national defense bond program to finance the war.
  • Secretary of the Treasury Henry Morgenthau, Jr., however, preferred a voluntary loan system and began planning a national defense bond program in the fall of 1940.
  • On the advice of Odegard, the Treasury began marketing the previously successful baby bonds as "defense bonds."
  • For those that found it difficult to purchase an entire bond at once, 10 cent savings stamps could be purchased and collected in Treasury-approved stamp albums until the recipient had accumulated enough stamps for a bond purchase.
  • The Treasury sold $185.7 billion of securities (over $2.1 trillion in 2016) to finance the war.

• Types of Bonds

  • The most common secured bonds.
  • This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
  • A term bond matures on the same date as all other bonds in a given bond issue.
  • Serial bonds in a given bond issue have maturities spread over several dates.
  • A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock.

• Zero-Coupon Bonds

  • A zero-coupon bond (also called a "discount bond" or "deep discount bond") is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.
  • Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds.
  • The bonds can be held until maturity or sold on secondary bond markets.
  • Treasury bill market is the most active and liquid debt market in the world.
  • The impact of interest rate fluctuations on strip bonds is higher than for a coupon bond.

• Other Types of Bonds

  • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
  • Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. government.
  • Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
  • The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries.
  • Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.

• Call Provisions

  • A callable bond (also called redeemable bond) is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.
  • Most callable bonds allow the issuer to repay the bond at par.
  • The price behavior of a callable bond is the opposite of that of puttable bond.
  • Price of callable bond = Price of straight bond – Price of call option
  • Coupon #1 was redeemed and cancelled on November 2, 1865, and coupon #35 on November 2, 1882, at which time the principal of $1,000.00 in gold coin was also paid from the Treasury of the City and County of San Francisco and the Bond was cancelled.

• Government Bonds

  • A government bond is a bond issued by a national government denominated in the country's domestic currency.
  • Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
  • At the secondary market, each bond will be assigned with very own bond code (ISIN code).
  • As an example, in the U.S., Treasury securities are denominated in U.S. dollars.
  • Treasury securities would have received lower returns in 2004 because the value of the U.S. dollar declined against most other currencies).