Learning outcomes.

After watching this video,

you will be able to explain and define the characteristics
of the government bonds. You will also be able to read the bond
quotes from a financial newspaper like the Wall Street Journal or
the Financial Times. Government bonds or treasury securities
are government debt instruments that are issued by the government,
typically the Department of Treasury, to finance a national debt of
the particular government. Treasury securities are often
referred to simply as treasuries. As I mentioned before
professional bond traders just use one word depending on
the issue of the bond. So if it's issued by the Department
of Treasury, I would just call them treasuries, so there are four types
of marketable treasury securities. They are treasury bill, you have
treasury notes, we have treasury bonds, and on other classes securities
what are called that TIPS or Treasury Inflation Protective Securities. Treasury
bills are sometimes
just called T-bills, mature in one year or less, so
they have a lifetime of one year or less. Now they do not pay any interest
prior to maturity, instead they are sold at a discount of the par value
to create a positive year to maturity. Typically, weekly T-bills
are commonly issued with maturity dates of 28 days,
which is 4 weeks, or about a month. They are also issued for 91 days. That's 31
weeks, 31 times 7,
that's 91 days which is about 3 months. They shoot for 182 days,that's 26 weeks,
about 6 months. And 364 days,
that's 52 weeks which is about a year. And now you can get the latest
rates in the markets page of the financial newspaper such
as the Wall Street Journal. For instance, on the 7th of January, 2016, the T-bill
for 28 days or 4 weeks was at 0.2%. Let me show you where on
the financial newspaper, you can actually see the T-bill rates. It's typically,
you get them in the Financial Times or the Wall Street Journal, you typically get
them at
the bottom of the market data page. And you can actually see that for the 7th of
Jan., 2016, the four-week T-bill rate was 0.2%. For the 13-week of T-bill
which is basically 91 days, the rate was 0.215% and for
the 26 weeks, it was 0.50% so that's with 180 days T-bills for
180 days was 0.5%. You have a second class of government debt
which are called as treasury notes or T-notes. Now the T-notes typically
mature in 2 to 10 years. They have a coupon payment unlike
T-bills which have no coupons. Our treasury notes have coupon payments
which you can receive every six months and have a denomination of a thousand
dollars. So in the basic transaction,
you can actually buy a T-note of $1,000 face value for
let's say $950, and you can collect interest of let's say,
3% per year over ten years. So effectively, you get $30 every year,
or 3% of $1,000, $30 every year. And over the 10 year horizon, you basically
receive
about $300 of cash flows. And initially you
typically invest the price. Whatever is the price, let's say
the price is 95, so it's $0.95 to $1. You're basically putting in $950 for
a T-note off a face value of $1,000. Now treasury notes and t-bonds,
are treasury notes and treasury bonds, are quoted in the secondary
market as a percentage off par, and in what I call less 30 seconds of
a point, or 1 by 32nd, 32 of a point. So for example, a quote of say 95 07,
which means 95 and 7 by 32, the price would basically be, for the face value of
1,000,
it's going to be 952.22, which is 95 + 7 by 32 for
a face value of a $1,000 bond. Now, there are several
different notations, which may be used for bond price quotes. You could have,
notations which include a plus, which basically indicates
one-sixty-fourth of a point. So examples, in, for instance,
if the price is quoted as 95 07+, essentially that means,
the price is 95 + 7 by 32nd plus 1 by 64. The plus basically indicates
1 by 64th of a dollar. So, the ten year treasury
note has now become the security that is most
frequently quartered when anybody discusses the performance
of the bond markets, and it's used to convey the market stake on
the long term macroeconomic expectations. So treasury bonds are the sometimes
also called as T- bonds or even they're sometimes they're
even called long bonds, they have the longest maturity
from 20 years to 30 years. Now, they have a coupon payment
every six months like the T-notes. And are currently issued
with a maturity of 30 years. The fourth class of security. You have T-bills, you
have T-notes,
and you have T-bonds. The fourth class is what I call TIPS, or
treasury inflation protected securities. And these are inflation indexed
bonds issued by the U.S. treasury. The principle is adjusted to
the consumer price index or the CPI which is the most commonly
used to measure inflation. So when CPI rises,
the principle adjusts upwards. If the index falls the CPI index falls. Then the
principle adjusts downwards. The coupon is a constant, but the cash flows that you
get are different
because the amount of interest that you get is multiplied by
the inflation adjusted principle. Therefore, protecting
the holder of the official inflation rate as asserted by the CPI. So our TIPS are
not too old. They've been issued less
than 20 years back. In fact, they were issued and
introduced in 1997. They're currently offered in the form of 5
year, in 10 years, in 30 years securities. So those are the maturities
in which TIPS are issued. You also have a fifth class of securities which are not
issued by the
government, but these are called STRIPS, or separate trading of registered
interest and principle securities. So they are basically T-notes,
T-bills, or TIPS whose interests and principle portions of the securities
have been separated or stripped. And they may then be sold separately in terms of
face value of
$100 in the secondary market. So the name derives form
the days before you had IT and securities were in form, when paper bonds
were physically traded, and traders would literally tear off the interest coupon of
the paper security for separate resale. Now, as I said before, the government
does not directly issue STRIPS. They're formed typically by investment
banks or brokerage firms but the government does register STRIPS and keeps an entry
of who
holds what kind of STRIPS. Now they cannot be bought directly through
the treasury's website so you can actually buy T-bills, T-bonds through the
Treasury
website called, treasury direct. So you can buy TIPS, or T-bonds, T-bills, all of
that on the internet at
the treasury's website called, treasury direct, but STRIPS are not
available at treasury direct because the treasury does not issue them,
they are only available through a broker. So essentially the more important, the
government born market essentially
comprises of four instruments and then you know an instrument that's actually
derived from these four instruments. You have T-bills, T-notes, T-bonds, and
TIPS ,and then you have what are called are STRIPS which are basically
just interest payments or principle payments of any of these
four class of government securities.