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Treasury Stock

Treasury Stock Definition

The treasury stock definition is the shares a company buys of its own stock on the open market. Shares of treasury stock were issued by the company, and then repurchased. So consider it issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.

Treasury stock can either be retired (cancelled) or resold on the open market. In addition, the shares have no voting rights, and they do not pay or accrue dividends. It is not included in financial ratios that use the value of common stock.

Treasury Stock on the Balance Sheet

Record treasury stock in the owner’s equity section of the balance sheet. Then record it at cost – what the company paid to acquire the shares – and subtract the value of the treasury stock from the stockholders’ equity account. The treasury stock account is a contra-equity account.

Stock Buyback (Repurchase Shares; Buyback Shares)

There are several reasons why a company would repurchase its own shares, including the following.

1. A company might buyback shares if it considers its stock undervalued. If the stock is undervalued, then management might want to buy shares because they consider them cheap.

2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)

3. A company can also repurchase shares to exercise stock options or to convert convertible bonds.

4. You can use stock buyback to thwart a takeover – if a company buys its own stock, then that stock is no longer available to the potential acquirer.

5. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds to repurchase stock.

6. A stock buyback could also be a sign that the company has excess cash and no other viable investment opportunities.

Treasury Stock Definition

See Also:
Convertible Debt Instrument
Common Stock Definition
Reverse Stock Split
Preferred Stocks
Hedging Risk
Private Placement

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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 Notes

See Also:
Treasury Securities
TIPS – Treasury Inflation Protected Securities

Treasury Notes Definition

The treasury notes definition, also known as t notes, is a U.S. government debt security that is generally intermediate in terms of its maturity. T notes generally have a maturity of one to ten years, and pay coupons as well as principal when they mature, just like regular corporate bonds.

Treasury Notes (t Notes) Explained

A Treasury Note is an intermediate term security that the government issues into the fixed income market. Because treasury notes are a government security it is essentially a risk free instrument, but because of the t-notes intermediate life it has a higher interest rate than that of the t bill, but less than that of the t bond. The t-note is fairly liquid in the markets and is sold in denominations of $1,000 or more for one to ten years.

Treasury Note Formula

The treasury note formula is similar to that of the t-bill formula, but different because a treasury note contains coupons or interest payments. It should be noted that the t-note formula is the same as for a treasury bond. Treasury note rates, current price, coupons, as well as the face value can all be derived and calculated using the following formula:

Current Price of Note = ∑ coupon payment               +            principal payment
(1+YTM)# years                                 (1+YTM)# years

Treasury Note Example

Let’s look at a treasury note example. Lumber Co. purchases a newly issued 5-year, $1,000 t-note with a YTM of 5%. The note also pays an 4% coupon on an annual basis. The note will mature in 5 years. What is the current price of the treasury note when it is issued to Lumber Co.?

Using the formula above the price can be calculated as follows:

($40/(1+.05)1) + ($40/(1+.05)2) + ($40/(1+.05)3) + ($40/(1+.05)4 + ($40/(1+.05)5) + $1,000/(1+.05)5) = $956.71

treasury notes, t notes, treasury note formula, Treasury Note Example

 

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Treasury Inflation Protected Securities

Treasury Inflation Protected Securities

Treasury Inflation Protected Securities or TIPS for short are debt instruments that are issued by the U.S. government. TIPS are indexed with the Consumer Price Index (CPI), and adjust accordingly to the inflation rate presented in the CPI.

Treasury Inflation-Protected Securities (TIPS) Explained

Treasury TIPS means that the security will adjust for inflation or deflation on whether the CPI increases or decreases. Because of this extra protection from inflation rates, TIPS owners are forced to pay more in taxes, a major disadvantage, when the security matures or it is sold. Treasury tips are normally sold with 5, 10, or 30 year maturities in denominations of $1,000 or more.

Treasury Inflation Protected Securities (TIPS) Example

Timmy has just invested in a TIPS note which has a 4% rate of return and a 10 year maturity. The following results are how an inflation protected security react to inflation and the market.

If interest rates rise by 1% in the first year then the principal would change to $1,010 (1,000 * 1.01). Thus the coupon rate would be calculated by taking 4% * $1,010 which equals a coupon payment of $40.40.

If the interest rates were to rise again by 2% then the new principal would change to $1,020 ($1,000 * 1.02), and the coupon payment would be 4% * $1,020 which equals $40.8.

Note: The new coupon payment and interest will change in the same manner no matter if deflation or inflation occurs.

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treasury inflation protected securities
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treasury inflation protected securities

See Also:
Treasury Securities
Treasury Notes (t notes)

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Treasury Bonds

Treasury Bonds

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:

Current Price of Bond =     ∑ coupon payment               +            principal payment
                              (1+YTM)# years                                (1+YTM)# years

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

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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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Internal Revenue Service (IRS)

See Also:
Cash Flow After Tax
Deferred Income Tax
Ad Valorem Tax
Tax Brackets
Tax Efficiency

Internal Revenue Service (IRS) Definition

The Internal Revenue Service or IRS for short is a government agency underneath the Department of Treasury. Furthermore, it is primarily responsible for administration and collections of federal income taxes.

Internal Revenue Service (IRS) Meaning

President Abraham Lincoln created the Internal Revenue Service during the Civil War and Reconstruction period to fund the war effort. Since then, the agency has been primarily responsible for funding the U.S. Government operations and services. The IRS is responsible for not only collecting from individuals and businesses, but also preparation and distribution of IRS forms. It is also responsible for conducting audits of individuals or businesses to ensure accuracy and that fraudulent activity has not occurred. A commissioner, known as the Commissioner of Internal Revenue, runs the IRS. Furthermore, the President fills this is a position. Like the Securities and Exchange Commission (SEC) the commissioner cannot be fired once appointed. This job security allows the commissioner to perform what is necessary without having to worry about getting fired.

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Internal Revenue Service

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