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Questions and Answers
What is the primary purpose of government securities?
What is the primary purpose of government securities?
What is the nominal value of a bond also known as?
What is the nominal value of a bond also known as?
Who can issue government bonds?
Who can issue government bonds?
What is the purpose of a bond's interest rate?
What is the purpose of a bond's interest rate?
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What happens to the principal amount at the maturity date of a government security?
What happens to the principal amount at the maturity date of a government security?
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What type of investment product is offered by a governmental body?
What type of investment product is offered by a governmental body?
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What is the term for the entity that borrows funds through a bond?
What is the term for the entity that borrows funds through a bond?
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What is the term for the amount written on the face of a bond certificate?
What is the term for the amount written on the face of a bond certificate?
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What is the primary reason why most government securities are issued?
What is the primary reason why most government securities are issued?
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What is the total amount of outstanding debt contributed by state and local governments in the U.S.?
What is the total amount of outstanding debt contributed by state and local governments in the U.S.?
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What is a characteristic of government securities?
What is a characteristic of government securities?
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What is the term for the date when the bond will be redeemed?
What is the term for the date when the bond will be redeemed?
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What type of securities can be traded among investors?
What type of securities can be traded among investors?
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What is the largest single borrower in the world?
What is the largest single borrower in the world?
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What is a type of non-marketable security?
What is a type of non-marketable security?
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What is the promise of government securities to investors?
What is the promise of government securities to investors?
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What is the secondary reason for issuing government securities?
What is the secondary reason for issuing government securities?
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Who can purchase government securities directly from the Treasury Department's website?
Who can purchase government securities directly from the Treasury Department's website?
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What is a characteristic of government securities that makes them attractive to investors?
What is a characteristic of government securities that makes them attractive to investors?
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What is a disadvantage of government securities compared to other securities?
What is a disadvantage of government securities compared to other securities?
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What is a common feature of Treasury Notes (T-Notes)?
What is a common feature of Treasury Notes (T-Notes)?
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What is the typical maturity range of Treasury Bills (T-Bills)?
What is the typical maturity range of Treasury Bills (T-Bills)?
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What is a characteristic of government securities issued by foreign governments?
What is a characteristic of government securities issued by foreign governments?
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What happens to the interest rate of government securities in a rising-rate market?
What happens to the interest rate of government securities in a rising-rate market?
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What is the primary purpose of the government issuing Treasury Bonds?
What is the primary purpose of the government issuing Treasury Bonds?
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How often do Treasury Bonds pay interest returns?
How often do Treasury Bonds pay interest returns?
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What is the face value of a Treasury Bond?
What is the face value of a Treasury Bond?
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How many strips can a 30-year T-bond be separated into?
How many strips can a 30-year T-bond be separated into?
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What is the yield to maturity (YTM) of a STRIP?
What is the yield to maturity (YTM) of a STRIP?
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What is the formula to calculate the price of a STRIP?
What is the formula to calculate the price of a STRIP?
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What is the present value of a STRIPS price?
What is the present value of a STRIPS price?
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What is the highest credit rating assigned by Moody's?
What is the highest credit rating assigned by Moody's?
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What is the term for bonds with a credit rating below BBB?
What is the term for bonds with a credit rating below BBB?
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What is the credit rating of bonds with a high likelihood of default?
What is the credit rating of bonds with a high likelihood of default?
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What is the term for bonds with a credit rating of AAA?
What is the term for bonds with a credit rating of AAA?
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What is the credit rating of bonds with a moderate credit risk?
What is the credit rating of bonds with a moderate credit risk?
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What is the term for bonds with a very low credit risk?
What is the term for bonds with a very low credit risk?
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What is the credit rating of bonds that are already in default?
What is the credit rating of bonds that are already in default?
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Study Notes
Bond Basics
- A bond is a debt instrument where an investor lends money to an entity (like a company or government) for a defined period at a fixed interest rate.
- Government securities are investment products offered by a governmental body, such as US Treasury bonds, bills, and notes.
Who Can Issue Bonds?
- Companies can issue corporate bonds.
- Governments can issue government bonds.
Bond Features
- Face value: the amount written on the bond certificate.
- Maturity date: when the bond will be redeemed.
- Coupon rate: the interest rate paid periodically.
Government Bond Basics
- The US government is the largest single borrower in the world, with a gross public debt of over $5 trillion in 2007.
- The US Treasury finances government debt by issuing marketable and non-marketable securities.
- Municipal government debt is a large debt market, with over 85,000 state and local governments contributing to about $2 trillion of outstanding debt.
Types of Government Bonds
- Marketable securities: can be traded among investors; include T-bills, T-notes, and T-bonds.
- Non-marketable securities: must be redeemed by the issuer; include US Savings Bonds, Government Account Series, and State and Local Government Series.
Key Points
- Government securities come with a promise of full repayment of invested principal at maturity.
- Government securities often pay periodic coupon or interest payments.
- Government securities are considered conservative investments with low-risk since they have the backing of the government that issued them.
- However, these securities may pay a lower rate of interest than corporate bonds.
Why are Government Securities Issued?
- To raise funds for government expenditures.
- To control the supply of money in an economy.
Who Buys Government Securities?
- Institutional investors buy government securities through auctions.
- Retail investors can purchase government securities directly from the Treasury Department's website, banks, or through brokers.
Pros and Cons of Government Securities
- Pros:*
- Steady stream of interest income.
- Low default risk.
- Some securities are exempt from state and local taxes.
- Can be bought and sold easily.
- Available through mutual funds and exchange-traded funds.
- Cons:*
- Low rates of return relative to other securities.
- Interest rates may not keep up with inflation.
- Foreign government securities can be risky.
- May pay a lower rate in a rising-rate market.
Treasury Bills (T-Bills)
- Typical maturities: 4, 8, 13, 26, and 52 weeks.
- Pay a higher interest rate return as the maturity terms lengthen.
Treasury Notes (T-Notes)
- Maturities: 2, 3, 5, or 10 years.
- Pay a fixed-rate coupon or interest payment semi-annually.
- Face values: 1,000(exceptfor2−and3−yearnotes,whichhave1,000 (except for 2- and 3-year notes, which have 1,000(exceptfor2−and3−yearnotes,whichhave5,000 face values).
Treasury Bonds (T-Bonds)
- Maturities: 10 to 30 years.
- Face values: $1,000.
- Pay semi-annual interest returns.
- Used to fund deficits in the federal budget.
- The Fed controls the money supply and interest rates through the buying and selling of T-Bonds.
U.S. Treasury STRIPS
- Separate Trading of Registered Interest and Principal of Securities.
- Derived from 10-year T-notes and 30-year T-bonds.
- Effectively zero-coupon bonds.
- STRIPS price is calculated as the present value of a single cash flow.
Credit Ratings
- Ratings agencies: Moody's, Standard & Poor's, Fitch Ratings.
- Ratings range from Aaa (highest quality) to C (poor quality).
- Investment grade ratings: Aaa to BBB.
- Non-investment grade ratings: BB to C.
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Description
Learn about government bonds, a type of debt instrument that allows investors to lend money to governments at a fixed interest rate. Understand the concept of government securities and their various types.
