Jul 24

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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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