Transcript Kidwell, Peterson, Blackwell & Whidbee

Treasury Inflation-Protected Securities
•
Issued in terms of 5, 10 and 30 years a few times a year
in par increments of $100.
•
Usual noncompetitive/competitive auction process.
•
Coupon rate determined at auction, fixed thereafter.
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Principal amount (upon which semi-annual coupon
payments are based) is adjusted twice per year in
accordance with the Consumer Price Index (CPI).
•
At maturity, pays adjusted principal or par, whichever is
greater.
•
TIPS can be used to impute expected rates of inflation in
future periods.
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Consumer Price Index (CPI-U)
end
Jan
end
Dec
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Example 1
Assume a $1,000 TIPS with a 2.5% coupon rate. If first
three semiannual inflations are 1.8%, 2.3% and 2.1%,
what are the first three coupon payments? What is
adjusted principal after 1.5 years?
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Treasury STRIPS Program
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Separate Trading of Registered Interest and Principal of
Securities.
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When a Treasury is stripped, each cash flow is used to
construct separate zero-coupon securities denominated in
$1,000 increments.
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Not created by Treasury Department. Created by any of
the dealers that work with Treasury.
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At the request of any such dealer, Treasury will procure
separate CUSIP numbers for each strip component.
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Strips created when sum of parts worth more than the
whole.
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Used for duration matching, lottery annuity payments, by
pension funds, insurance companies, etc.
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Example 2
How many $1,000 strip securities can a dealer create
from the purchase of $1 million in face value of a 5%
4-year Treasury note?
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National Debt
http://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_fy2014.htm
9/29/2014
9/30/2013
9/30/2012
9/30/2011
9/30/2010
9/30/2009
Held by Public
12.78
11.97
11.26
10.12
9.02
7.55
Intragovernmental
Holdings
5.04
4.76
4.79
4.66
4.53
4.35
Total
17.82
16.73
16.05
14.78
13.55
11.90
9/30/2008
9/30/2007
9/30/2006
9/30/2005
9/30/2004
5.80
5.05
4.84
4.60
4.30
4.21
3.95
3.66
3.33
3.07
10.01
9.00
8.50
7.93
7.37
Intragovernmental Holdings include:
Social security trust fund
Fed employees and military retirement trust funds
Disability insurance trust funds
Other (airport, highway, unemployment, etc.)
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Distribution of Debt Held by Public
Of the $12.78 trillion held by the public, roughly
T-Bills
Notes
Bonds
TIPs
Other
10 %
60 %
15 %
10 %
5%
Half held by foreign governments.
Ave interest rate is 2.38%. This requires how much per
year to pay interest on the public portion of the debt?
Intergovernmental Holdings are not tradable.
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Social Security (OASI) Trust Fund
2013: $2.673 trillion in trust fund (“piggybank”)
Old-Age and Survivors Insurance
2013: $743B in, $679B out.
Piggybank empty by 2040. Then can pay only about 70% of promised
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benefits.
OASI Trust Fund (in billions)
http://www.ssa.gov/OACT/STATS/table4a1.html
2005
2006
2007
2008
2009
2010
2011
2012
2013
Receipts Benefits
604
442
642
461
675
496
695
516
698
564
677
585
699
604
731
645
743
679
Net Inc
162
181
179
179
134
92
95
86
64
Balance
1,663
1,844
2,024
2,203
2,337
2,429
2,524
2,610
2,673
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Municipal Bonds
• General Obligation Bonds. Backed by “full faith and
credit” of issuing political entity. Require voters’
approval which often refused. Very safe when available.
• Revenue Bonds. Be careful. Coupon and principal
payments can only be made with cash flows from the
specific project (toll roads, sewage treatment plants,
professional sport facilities, etc.)
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Municipal Bonds
• Issued by states, counties, cities, school districts,
university systems, transit systems, etc.
• Distinguishing feature of munis is that coupon
payments are exempt from federal tax (usually from
state tax in state of issue, too).
• When comparing muni with a comparable taxable
bond
iat  ibt (1  t )
• Typically sold as serial bond issues (see pp. 250-51)
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Bearer Bonds (not many left)
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Bond Indenture
Specifies collateral
• Mortgage bond - real assets pledged.
• Equipment trust certificates - specific, titled, or
identifiable equipment.
• Collateral bonds - secured by financial assets.
• Debentures - unsecured bonds.
Specifies priority of claims on assets
• Senior debt - first priority on general assets.
• Subordinated (junior) debt - below senior. Debentures at
bottom.
Considerations concerning repayment of principal
• Sinking fund provisions. The putting aside of sums for the
repayment of principal when due, or the periodic
retirement of a number of bonds selected randomly.
• Call and/or put provisions
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Junk Bonds
• Junk bonds were not sellable in the primary market
until late 1970s.
• Junk bond also known as High Yield bonds, so don’t
be misled.
• Secondary market appeared in early 1980s.
• “Low credit quality” firms now able to issue longterm fixed rate marketable debt, rather than be at
mercy of commercial banks.
• Many investors attracted to junk bonds because of
high yield.
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Foreign Bonds
• Issued in a financial market of a nation by a foreign
company in that country.
• If a foreign firm issues a bond in the US, it is called
a Yankee bond.
• Bonds issues by foreign firms in Japan are called
Samurai bonds.
• Must conform to the regulations of country in which
sold.
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