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Treasury and Agency Securities

Treasury and Agency Securities. Zvi Wiener Based on Chapter 6 in Fabozzi Bond Markets, Analysis and Strategies. Treasury Securities. Issued by the US department of the Treasury and are backed by US government. 1997 the market was $3.4T with 260 issues For comparison:

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Treasury and Agency Securities

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  1. Treasury and Agency Securities Zvi Wiener Based on Chapter 6 in Fabozzi Bond Markets, Analysis and Strategies http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

  2. Treasury Securities • Issued by the US department of the Treasury and are backed by US government. • 1997 the market was $3.4T with 260 issues • For comparison: • 1997 corporate bonds $1.4T with 10,000 issues, • 1997 municipals $1.8T with 70,000 issuers. Fabozzi Ch 6

  3. Types of Treasuries • Treasury Bills – discounted, with initial maturities of 91, 182 and 364 days. • T-Notes – one to ten years • T-Bonds – more than 10 years to maturity • Recently many changes – no more 20 and 3 year issues, etc. Fabozzi Ch 6

  4. TIPS • Inflation protected securities, similar to Israeli CPI linked bonds. • Taxation problems. Fabozzi Ch 6

  5. Auction • Primary market – primary dealers • Secondary market • When-issued market, TBA etc. Fabozzi Ch 6

  6. Price quotes for T-Bills Yd = annualized yield D = dollar discount F = face value t = number of days to maturity Fabozzi Ch 6

  7. Price quotes for T-Bills A T-Bill with 100 days to maturity And face value of $100,000 is traded for $97,569 will be quoted at 8.75% on a bank discount basis Fabozzi Ch 6

  8. Bond Equivalent Yield Fabozzi Ch 6

  9. Price quotation of bonds • In units of 1/32, for example 92-14 means that the price is • 92+14/32% of par (plus accrued interest) • + means 1/64 Fabozzi Ch 6

  10. Accrued Interest • Additional payment for part of the coupon $ time Fabozzi Ch 6

  11. Price Quotes and Accrued Interest • Assume that the par value of a bond is $1,000. • Price quote is in % of par + accrued interest • the accrued interest must compensate the seller for the next coupon. Fabozzi Ch 6

  12. Trade date • Settlement date • Safekeeping Fabozzi Ch 6

  13. STRIPS • Separate Trading of Registered Interest and Principal of Securities. • Reconstitution of a bond. Fabozzi Ch 6

  14. Government Sponsored Enterprises • Federal Home Loan Bank System • Federal National Mortgage Association • Federal Home Loan Mortgage Corporation • Federal Farm Credit Bank System Fabozzi Ch 6

  15. Government-Sponsored Enterprises • Fannie Mae “benchmark” and Freddie Mac “reference” notes and bond. • Can be electronically transferred through clearing houses as Euroclear and Cedel and NBES. • Outstanding amount $150B with 2-30 years to maturity. Fabozzi Ch 6

  16. Government-Sponsored Enterprises • GNMA - Government National Mortgage Association • FHLBS - Federal Home Loan Bank System • Sallie Mar - Student Loan Marketing Association Fabozzi Ch 6

  17. Repurchase Agreements • Borrowing and lending using Treasuries and other debt as collateral. • Repo (loan). You sell a security to counterparty and agree to repurchase the same security at a specified price at a later date (often next day). • Reverse Repo - you agree to purchase a security and sell it back at a specified price later. Fabozzi Ch 6

  18. Repurchase Agreements • Most repos are general-collateral repo rate. • Some securities are special (for example on-the-run). • Specialness peaks around next auction, then declines sharply. • NY FED operates a securities lending for primary dealers using FED’s portfolio while posting other Treasury security as collateral. Fabozzi Ch 6

  19. Treasury Based Derivatives • Futures and options for 2, 5, 10 year notes and bonds are listed by CBOT and CFFE. CNE offers futures and options on bills and other short term interest rate products. • End of October 99 open interest for CBOT long-bond futures was 635,000 (each one based on $100,000 face value). • Daily volume 300,000 contracts. Fabozzi Ch 6

  20. Treasury Based Derivatives • CBOT also offers options on Treasury futures - contract that allows the holder to buy/sell a future contract at a specified price. • Cheapest-to-deliver option and conversion factor (compare to commodities). Fabozzi Ch 6

  21. TIIS = TIPS • Treasury Inflation Indexed (Protected) Securities. • Since 97, $92B were issued, based on the non-seasonally adjusted CPI lagged 2.5 months. • The quoted price do not reflect the accumulated inflation compensation. • Real price = quoted*index ratio + accrued interest • I-bonds saving bonds that are also CPI indexed. Fabozzi Ch 6

  22. TIIS = TIPS • 5, 10, 30 years notes and bonds. • Less liquid: 2-6 cents per $100 face. • CBOT offers options and futures on TIPS • Canada, France, England, Israel have similar types of debt. Fabozzi Ch 6

  23. T-bills markets • Issuance of T-bills was cut sharply. • Between Dec-96 and Sep-99 the total outstanding amount of coupon securities declined 7% while bills declined 16%. • Treasury Debt buybacks. Reverse auctions trying to remove small issues. Fabozzi Ch 6

  24. Home AssignmentChapter 6 • Questions 1, 5, 7 Fabozzi Ch 6

  25. UST example • 8.75 UST 11/08 • Security was purchased 06-Jun-01 @ 110-31 • Security was sold 06-Sep-01 @ 109-27+ • Calculate the loss (10,000 units) … Fabozzi Ch 6

  26. UST example • Bought 11,096,875.00 • Accrued 23 days 54,687.50 • 11,151,562.50 • Sold 10,984,375.00 • Accrued 115 days 273,437.50 • 11,257,812.50 • Profit of $106,350.00 Fabozzi Ch 6

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