A treasury bond, or t bond for short, is a U.S. government debt security that is generally long term with regard to its maturity. t bonds generally have a maturity of ten years or more, and pay coupons as well as principal when they mature.
Treasury Bonds (T bonds) Explained
A Treasury Bond is the longest term security that the government issues into the fixed income market. Because it is a government security it is essentially a risk free instrument, but because of its longevity it has a higher interest rate than that of the t bill. It is fairly liquid in the markets and is sold in denominations of $1,000 or more for 10 years or longer.
T Bond or Treasury Bond Formula
The treasury bond formula is similar to that of the t-bill formula, but different because a t-bond contains interest payments or coupons. Treasury bond rates, current price, coupons, as well as the face value can all be derived and calculated using the following formula:
Treasury Bond (T bond) Example
Wawadoo Inc. purchases a 10-year, $1,000 t bond with a current YTM of 5% . The bond also pays an 4% coupon on an annual basis. The bond will mature in 8 years. What is the current price of the bond?
Calculate the price using the formula above:
($40/(1+.05)1) + ($40/(1+.05)2) + ($40/(1+.05)3)…..($40/(1+.05)8) + $1,000/(1+.05)8) = $935.37