6 TREASURY AND AGENCY
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posts/10154011732756619
TREASURY AND AGENCY
SECURITY MARKETS
TREASURY SECURITIES
Issued by the US Department of the Treasury and are backed
by the full faith of the US Government.
WHAT ARE THE ADVANTAGES OF INVESTING IN TREASURIES ?
•NO CREDIT RISK
•BENCHMARK INTEREST RATES
•MOST LIQUID MARKET
•$11 TRILLION OUTSTANDING WITH 260 ISSUES
(corporate market is $3.8 trillion with > 10 000 issuers)
•NOT CALLABLE
•Book –entry Form from the federal reserve (not nominal easy transfer)
3 TYPE OF
TREASURY SECURITIES
NON CALLABLE
TREASURY BONDS
> 10 YEARS
TREASURY NOTES
2 – 10 YEARS
TREASURY BILLS
< 1 YEAR
TREASURY BONDS
•ISSUED CLOSE TO PAR
•COUPON RATE
•MATURES AT PAR VALUE
TREASURY NOTES
•ISSUED CLOSE TO PAR
•COUPON RATE
•MATURES AT PAR VALUE
TREASURY BILLS
•ISSUED AT DISCOUNT
• NO COUPON RATE
•MATURES AT PAR VALUE
TREASURY COUPON SECURTIES
2, 5, 10, 30 Years
Less than 1 Year
•24 HOUR TRADING OF TREASURY SECURITIES
•THE SECONDARY MARKET : MOST LIQUID
ON-THE-RUN ISSUE : Most recently auctionned Treasury
OFF-THE-RUN ISSUE : Issues auctioned before the most recent one
LTCM CASE
TIPS ( 5 – 10 – 30 years)
Treasury Inflation Protection Security
REAL RATE = NOMINAL RATE - INFLATION RATE
•Coupon is variable (coupon is called the real rate)
•Coupon and maturity adjusted every 6 months
(called « inflation adjusted capital »)
Principal
:$100 000
Annual coupon rate : 3.5%
Inflation rate (yearly basis)
: 2%
Suppose than in the next period, inflation rate (yearly basis) is 3% ?
SEMI ANNUAL INFLATION RATE :
1%
6-MONTH INFLATION ADJUSTED PRINCIPAL :
$101 000 x 1,015
1,5%
$101 000
$102 515
DOLLAR AMOUNT OF COUPON PAYMENT (every 6 months) :
101 000 x 1.75% = $1767.50
102,515 x 1.75% = $1794.00
TREASURY AUCTIONS
•Treasury Securities are all issued on an auction basis
•Congress imposes a restriction on the total amount of bonds outstanding
(debt ceiling)
•Computerized auction accessible by authorized broker-dealers
Types of Treasury securities
•3-months and 6-months bills
weekly (Monday)
1-year bill
every fourthweek (Thursday)
2-year - 5-year notes
monthly (last day of each month)
10-year and 30-year bonds
quarterly (Feb, May, Aug , Nov)
Bid to cover ratio : ratio of bids received to bids sold
Bid-to-Cover Ratio
Definition
A ratio that compares the number of bids received in a Treasury security auction to the
number of bids accepted. The bid-to-cover ratio is an indicator of the strength or
demand for a Treasury offering relative to investor bids deemed suitable in the auction
process. A higher ratio would be an indication of a strong or "bought" auction.
Investopedia Says
For example, a ratio above 2.0 indicates a successful auction comprised of aggressive
bids. On the other hand, a low ratio is an indication of a disappointing auction, marked
by a wide bid-ask spread. In such a scenario, investor demand for Treasury securities
at anticipated rates is below expectation, which could lead to an underbought issue if
the ratio falls below 1.0.
$50 BILLION of 2-year note to be distributed by the Treasury
Non competitive bidder
Competitive bidders
FEDERAL RESERVE
BROKER DEALERS
$5 Billion
Average price of
Competitive bidders
$45 Billion
Bid from lowest
To highest yield
$15 Billion of 10 year Note Auction
Fed needs 2 Billion
+
Bids
•Bank America: 7 billion@3.62%
•Goldman Sachs : 4 billion @3.60%
•Morgan Stanley : 2 billion@3.57%
•JP Morgan : 1 billion @ 3.58%
SECONDARY MARKET
•24-HOUR TRADING
•Primary trading locations : NEW YORK LONDON TOKYO
•Most liquid financial market in the world
•Over the counter (OTC) trading
•On-the-run issue vs. Off-the-run-issue
•Bid to cover ratio
Which is more liquid ?)
Day Count Conventions
in the U.S.
Treasury Bonds:
CorporateBond:
Money Mkt:
Actual/Actual
30/360
Actual/360
Treasury Bond Price Quotes
in the U.S
Cash price = Quoted price + Accrued Interest
Principal of a bond = 90-16 means 90-16/32 =
90.5
TREASURY BILLS
•3-MONTH TREASURY BILLS
•6-MONTH TREASURY BILLS
•1-YEAR TREASURY BILLS
Treasury Bill Quote in the U.S.
If Y is the yield of a Treasury bill that has t
days to maturity the quoted price is
Y= D/F x 360/t
D=discount to face value = 100 – price
F= 100
T-BILL PRICING
What is the quoted yield of a 100 day T-Bill with a face value of
$100,000 if its cash price is 97.56?
8.78%
INTEREST RATE FUTURES
TREASURY BOND FUTURES (CBOT)
EURODOLLAR FUTURES (CME)
Treasury Bond Futures
One contract = $100 000 worth of noncallable 15-year bonds or more.
Cash price received by party with short
position =
Quoted futures price × Conversion factor
+ Accrued interest
The conversion factor for a bond is approximately
equal to the value of a 20-year bond on the
assumption that the yield curve is flat at 6% with
semiannual compounding
To make delivery equitable to both parties, the CBOT
has introduced Conversion factors for determining the invoice
price of each acceptable deliverable Treasury issue against
the T Bond Future contract.
CBOT
T-Bonds & T-Notes
Factors that affect the futures price:
–Delivery can be made any time during the
delivery month
–Any of a range of eligible bonds can be
delivered
–The wild card play
Conversion Factor
The conversion factor for a 20-year bond is
approximately equal to the value of the
bond on the assumption that the yield curve
is flat at 6% with semiannual compounding
Because the different deliverable bonds have different coupons and
maturities they need to be put on a common basis.The futures
exchange therefore puiblishes a « price factor » or conversion
factor » for each deliverable bond.
The price that the buyer must pay the seller when a Treasury Bond is delivered
is called the invoice price
The invoice price is the is the settlement future price’s value + Accrued on the bond
delivered.
The invoice price , depending on what bond is chosen for delivery must be adjusted.
It is The Conversion factor that ajusts the invoice price.
Suppose that the Tbond futures contract settles at 94-8 and that the short elects to
deliver a Treasury bond issue with a conversion factor of 1.20. The future contract
settlement price of 94-08 means 94,25% of face value. As the contract size is $100,000,
the invoice price the buyer pays the seller is:
100,000 x 0,9425 x 1.20 + accrued = $113,100 + accrued
CHEAPEST TO DELIVER
The party with the short position can choose which of the available bond,
from the CBOT list, is CHEAPEST TO DELIVER.
The party with the short position receives :
(Quoted futures price × Conversion factor) + Accrued interest
Party with the short position receives (+):
(Quoted futures price × Conversion factor) + Accrued interest
…..and
Cost of purchasing a bond is (-) :
Quoted price + Accrued interest
…..and
The CTD bond is the one where (=) :
Quoted price – (Quoted futures price x Conversion factor)
Is the lowest !
Assume the futures contract price is 93-08. What is the CTD bond ?
BOND
QUOTED PRICE
CONV FACTOR
1
99.50
1.0382
2.68
2
X
143.50
1.5188
1.87
3
119.75
1.2615
2.11
EURODOLLAR FUTURES
(CME LIFFE)
•The most popular futures contract on short-term
interest rates (pegged to the LIBOR)
•A eurodollar is a dollar deposited in a US or foreign
bank outside the United States.
•The size of the contract is $1 000 000.
100 – 3 MONTH LIBOR
Eurodollar Futures
• If Z is the quoted price of a Eurodollar futures
contract, the value of one contract is :
10,000[100-0.25(100-Z)]
• A change of one basis point or 0.01 in a
Eurodollar futures quote corresponds to a
contract price change of $25
100 – 3 MONTH LIBOR
The quote of 94.32 for the September 1998
contract corresponds to a contract price of :
10,000 [100 - 0.25(100 - 94.32)] = $985,800
If a trader is long 10 contracts and it moves from
94.32 to 95.00, he makes (68 x $25) per contract !
that is $17,000 profit !
Eurodollar Futures
• A Eurodollar futures contract is settled in cash ( no
possible delivery)
• Eurodollar futures contracts last out to
10 years
STRIPS
Separate Trading of Registerd Interest and Principal of Securities
•Zero coupon treasury bonds
•Accrued interest is taxed yearly
Federal Agency Securities
•Federal Home Loan bank System
•Federal National Mortgage Association (FNMA)
•Student Loan Marketing Association
•Federal Farm credit bank system
Not backed by the Us Government
Credit risk
Tod
ay
is y
our
day
Jan
et…
.
posts/10154011732756619
TREASURY AND AGENCY
SECURITY MARKETS
TREASURY SECURITIES
Issued by the US Department of the Treasury and are backed
by the full faith of the US Government.
WHAT ARE THE ADVANTAGES OF INVESTING IN TREASURIES ?
•NO CREDIT RISK
•BENCHMARK INTEREST RATES
•MOST LIQUID MARKET
•$11 TRILLION OUTSTANDING WITH 260 ISSUES
(corporate market is $3.8 trillion with > 10 000 issuers)
•NOT CALLABLE
•Book –entry Form from the federal reserve (not nominal easy transfer)
3 TYPE OF
TREASURY SECURITIES
NON CALLABLE
TREASURY BONDS
> 10 YEARS
TREASURY NOTES
2 – 10 YEARS
TREASURY BILLS
< 1 YEAR
TREASURY BONDS
•ISSUED CLOSE TO PAR
•COUPON RATE
•MATURES AT PAR VALUE
TREASURY NOTES
•ISSUED CLOSE TO PAR
•COUPON RATE
•MATURES AT PAR VALUE
TREASURY BILLS
•ISSUED AT DISCOUNT
• NO COUPON RATE
•MATURES AT PAR VALUE
TREASURY COUPON SECURTIES
2, 5, 10, 30 Years
Less than 1 Year
•24 HOUR TRADING OF TREASURY SECURITIES
•THE SECONDARY MARKET : MOST LIQUID
ON-THE-RUN ISSUE : Most recently auctionned Treasury
OFF-THE-RUN ISSUE : Issues auctioned before the most recent one
LTCM CASE
TIPS ( 5 – 10 – 30 years)
Treasury Inflation Protection Security
REAL RATE = NOMINAL RATE - INFLATION RATE
•Coupon is variable (coupon is called the real rate)
•Coupon and maturity adjusted every 6 months
(called « inflation adjusted capital »)
Principal
:$100 000
Annual coupon rate : 3.5%
Inflation rate (yearly basis)
: 2%
Suppose than in the next period, inflation rate (yearly basis) is 3% ?
SEMI ANNUAL INFLATION RATE :
1%
6-MONTH INFLATION ADJUSTED PRINCIPAL :
$101 000 x 1,015
1,5%
$101 000
$102 515
DOLLAR AMOUNT OF COUPON PAYMENT (every 6 months) :
101 000 x 1.75% = $1767.50
102,515 x 1.75% = $1794.00
TREASURY AUCTIONS
•Treasury Securities are all issued on an auction basis
•Congress imposes a restriction on the total amount of bonds outstanding
(debt ceiling)
•Computerized auction accessible by authorized broker-dealers
Types of Treasury securities
•3-months and 6-months bills
weekly (Monday)
1-year bill
every fourthweek (Thursday)
2-year - 5-year notes
monthly (last day of each month)
10-year and 30-year bonds
quarterly (Feb, May, Aug , Nov)
Bid to cover ratio : ratio of bids received to bids sold
Bid-to-Cover Ratio
Definition
A ratio that compares the number of bids received in a Treasury security auction to the
number of bids accepted. The bid-to-cover ratio is an indicator of the strength or
demand for a Treasury offering relative to investor bids deemed suitable in the auction
process. A higher ratio would be an indication of a strong or "bought" auction.
Investopedia Says
For example, a ratio above 2.0 indicates a successful auction comprised of aggressive
bids. On the other hand, a low ratio is an indication of a disappointing auction, marked
by a wide bid-ask spread. In such a scenario, investor demand for Treasury securities
at anticipated rates is below expectation, which could lead to an underbought issue if
the ratio falls below 1.0.
$50 BILLION of 2-year note to be distributed by the Treasury
Non competitive bidder
Competitive bidders
FEDERAL RESERVE
BROKER DEALERS
$5 Billion
Average price of
Competitive bidders
$45 Billion
Bid from lowest
To highest yield
$15 Billion of 10 year Note Auction
Fed needs 2 Billion
+
Bids
•Bank America: 7 billion@3.62%
•Goldman Sachs : 4 billion @3.60%
•Morgan Stanley : 2 billion@3.57%
•JP Morgan : 1 billion @ 3.58%
SECONDARY MARKET
•24-HOUR TRADING
•Primary trading locations : NEW YORK LONDON TOKYO
•Most liquid financial market in the world
•Over the counter (OTC) trading
•On-the-run issue vs. Off-the-run-issue
•Bid to cover ratio
Which is more liquid ?)
Day Count Conventions
in the U.S.
Treasury Bonds:
CorporateBond:
Money Mkt:
Actual/Actual
30/360
Actual/360
Treasury Bond Price Quotes
in the U.S
Cash price = Quoted price + Accrued Interest
Principal of a bond = 90-16 means 90-16/32 =
90.5
TREASURY BILLS
•3-MONTH TREASURY BILLS
•6-MONTH TREASURY BILLS
•1-YEAR TREASURY BILLS
Treasury Bill Quote in the U.S.
If Y is the yield of a Treasury bill that has t
days to maturity the quoted price is
Y= D/F x 360/t
D=discount to face value = 100 – price
F= 100
T-BILL PRICING
What is the quoted yield of a 100 day T-Bill with a face value of
$100,000 if its cash price is 97.56?
8.78%
INTEREST RATE FUTURES
TREASURY BOND FUTURES (CBOT)
EURODOLLAR FUTURES (CME)
Treasury Bond Futures
One contract = $100 000 worth of noncallable 15-year bonds or more.
Cash price received by party with short
position =
Quoted futures price × Conversion factor
+ Accrued interest
The conversion factor for a bond is approximately
equal to the value of a 20-year bond on the
assumption that the yield curve is flat at 6% with
semiannual compounding
To make delivery equitable to both parties, the CBOT
has introduced Conversion factors for determining the invoice
price of each acceptable deliverable Treasury issue against
the T Bond Future contract.
CBOT
T-Bonds & T-Notes
Factors that affect the futures price:
–Delivery can be made any time during the
delivery month
–Any of a range of eligible bonds can be
delivered
–The wild card play
Conversion Factor
The conversion factor for a 20-year bond is
approximately equal to the value of the
bond on the assumption that the yield curve
is flat at 6% with semiannual compounding
Because the different deliverable bonds have different coupons and
maturities they need to be put on a common basis.The futures
exchange therefore puiblishes a « price factor » or conversion
factor » for each deliverable bond.
The price that the buyer must pay the seller when a Treasury Bond is delivered
is called the invoice price
The invoice price is the is the settlement future price’s value + Accrued on the bond
delivered.
The invoice price , depending on what bond is chosen for delivery must be adjusted.
It is The Conversion factor that ajusts the invoice price.
Suppose that the Tbond futures contract settles at 94-8 and that the short elects to
deliver a Treasury bond issue with a conversion factor of 1.20. The future contract
settlement price of 94-08 means 94,25% of face value. As the contract size is $100,000,
the invoice price the buyer pays the seller is:
100,000 x 0,9425 x 1.20 + accrued = $113,100 + accrued
CHEAPEST TO DELIVER
The party with the short position can choose which of the available bond,
from the CBOT list, is CHEAPEST TO DELIVER.
The party with the short position receives :
(Quoted futures price × Conversion factor) + Accrued interest
Party with the short position receives (+):
(Quoted futures price × Conversion factor) + Accrued interest
…..and
Cost of purchasing a bond is (-) :
Quoted price + Accrued interest
…..and
The CTD bond is the one where (=) :
Quoted price – (Quoted futures price x Conversion factor)
Is the lowest !
Assume the futures contract price is 93-08. What is the CTD bond ?
BOND
QUOTED PRICE
CONV FACTOR
1
99.50
1.0382
2.68
2
X
143.50
1.5188
1.87
3
119.75
1.2615
2.11
EURODOLLAR FUTURES
(CME LIFFE)
•The most popular futures contract on short-term
interest rates (pegged to the LIBOR)
•A eurodollar is a dollar deposited in a US or foreign
bank outside the United States.
•The size of the contract is $1 000 000.
100 – 3 MONTH LIBOR
Eurodollar Futures
• If Z is the quoted price of a Eurodollar futures
contract, the value of one contract is :
10,000[100-0.25(100-Z)]
• A change of one basis point or 0.01 in a
Eurodollar futures quote corresponds to a
contract price change of $25
100 – 3 MONTH LIBOR
The quote of 94.32 for the September 1998
contract corresponds to a contract price of :
10,000 [100 - 0.25(100 - 94.32)] = $985,800
If a trader is long 10 contracts and it moves from
94.32 to 95.00, he makes (68 x $25) per contract !
that is $17,000 profit !
Eurodollar Futures
• A Eurodollar futures contract is settled in cash ( no
possible delivery)
• Eurodollar futures contracts last out to
10 years
STRIPS
Separate Trading of Registerd Interest and Principal of Securities
•Zero coupon treasury bonds
•Accrued interest is taxed yearly
Federal Agency Securities
•Federal Home Loan bank System
•Federal National Mortgage Association (FNMA)
•Student Loan Marketing Association
•Federal Farm credit bank system
Not backed by the Us Government
Credit risk
Tod
ay
is y
our
day
Jan
et…
.