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Treasury Securities

See Also:
Fixed Income Securities
Zero Coupon Bonds
What is Inflation?
Coupon Rate Bond
Non-Investment Grade Bonds (Unsecured Debentures)

Treasury Securities Definition

Treasury Securities consist of debt instruments issued by the U.S. government by the Bureau of Public Debt. Therefore, the market for these instruments is very liquid. Oftentimes, consider them to be basically risk free. This is because the United States Government backs them by the good faith.

Treasury Securities Explained

Treasury securities, as said above, are very liquid and essentially risk free. The U.S. government sells them at treasury securities‘ auctions. A treasury security auction is generally held a week after the announcement for a new issuance of securities. There is also a large secondary market for them where they are traded on a day to day basis. Rates vary from instrument to instrument, and are generally in relation to a treasury security’s maturity. There are currently four types of these instruments. See the following instruments listed from most liquid to least as well as shortest maturity to the longest maturity:

1) Treasury Bills (t bills)

2) Treasury Notes (t notes)

3) Treasury Bonds (t bonds)

4) Treasury Inflation Protected Securities (TIPS)

Note: There is one more type of security that exists from stripping the coupons and principal away from the treasury security as a whole. They are also known as Treasury STRIPS.

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Treasury Bills

Treasury Bills

Treasury bills are a short term government treasury security which has a maturity of less than a year. T-bills do not generally pay coupons or interest much like zero coupon bonds.

Treasury Bills (t bills) Explained

Because treasury bills do not pay coupons they are sold at a discount in an auction held by the Bureau of Public Debt. A t-bill is essentially risk free and highly liquid due to its short term nature. There are four different types of t bills which are sold according to their respective maturities. T bills are sold with maturities of 28 days, 91 days, 182 days, and 364 days. T-bills are also sold in certain denominations which range from $10,000 to $1 million.

Treasury Bill (t bill) Formula

Treasury bill rates can be calculated using the following formula:

((Face Value – Purchase Price)/Face Value) * (360/Days until Maturity) = Yield or Rate

Treasury Bills (t bills) Example

A $10,000 face value 91 day (3 month) t bill is currently being sold at auction. Lumber Co. purchases this t bill for a discount at a price of $9,833. What is the yield on this particular treasury bill at the time of sale.

(($10,000-$9,833)/$10,000)* (360/91) = Yield

(.0167)* (3.956) = Yield

Yield = .0661 or 6.61%

Treasury bills

See Also:
Treasury Securities
Treasury Inflation Protected Securities (TIPS)

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