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

18

Government Bonds


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Government Bonds

Our goal in this chapter is to examine the securitiesissued by federal, state, and local governments.

Together, these securities represent more than $6trillion of outstanding debt.


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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 theissuer.

Non-marketable securities include U.S. Savings Bonds,Government Account Series, and State and LocalGovernment Series.


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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 theirface value (or redemption value) atmaturity.

Face value denominations for T-bills are as small as$1,000.

T-bills are sold on a discount basis (the discountrepresents the imputed intereston the bill).


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U.S. Treasury Notes (T-notes)

T-notes are medium-term obligations, usually withmaturities of 2, 5, or 10 years (when issued).

T-notes pay semiannual coupons (at a fixed couponrate) in addition to their face value (at maturity).

T-notes have face value denominations as small as$1,000.


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U.S. Treasury Bonds (T-bonds)

T-bonds are long-term obligations with maturities ofmore than 10 years (when issued).

T-bonds pay semiannual coupons (at a fixed couponrate) in addition to their face value (at maturity).

T-bonds have face value denominations as small as$1,000.


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Zero Coupon Bond Prices by Yieldto Maturity and Maturity


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Zero Coupon Bond Prices


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WSJ Prices for Treasury Bonds,Notes and Bills


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Straight Bond Prices and Yield to Maturity

Recall: The price of a bond is found by adding together thepresent value of the bonds coupon payments and thepresent

value of the bonds 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 thebond, measured in years.

2M2M2

YTM1

FV

2YTM1

11

YTM

CPric

-

!


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Treasury Bond Prices and YTM,for Different Maturities


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U.S. Treasury Auctions, Details

At each Treasury auction, the Federal Reserve acceptssealed 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 besubmitted by individual investors.

The price and yield of the issue is determined by theresults of the competitive auction process.


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U.S. Savings Bonds, I.

The U.S. Treasury offers an investment opportunity forindividual investors by issuing two types of SavingsBonds:

Series EESavings 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.


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U.S. Savings Bonds, II.

Series ISavings 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 fixedrate plus the recent inflation rate), and

Can be redeemed for the original price plus all prior accruedinterest.


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Federal Government Agency Securities

Most U.S. government agencies consolidate theirborrowing through the Federal Financing Bank, whichobtains funds directly from the U.S. Treasury.

However, several federal agencies are authorized toissue securities directly to the public. Examples include: The Resolution Trust Funding Corporation

The World Bank

The Tennessee Valley Authority


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Municipal Bonds

Municipal notes and bonds, ormunis, are intermediate-to long-term interest-bearing obligations of state andlocal governments, or agencies of those governments.

Because their coupon interest is usually exempt fromfederal income tax, the market for municipal debt iscommonly called the tax-exempt market.


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Municipal Bonds


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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 intheir trading procedures).

Are commonly issued with a serial maturity structure (hence theterm 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).


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Municipal Bond Quotes


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Municipal Bond Credit Ratings


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Useful Websites

www.investinginbonds.com (lots of information onbonds, bonds, bonds)

www.ustreas.gov (visit the U.S. Treasury)

www.publicdebt.treas.gov (lots of information onTreasury securities)

www.savingsbonds.com (for the latest on Savings

Bonds)

www.municipalbonds.com (check out munis)


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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


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Chapter Review, II.


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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