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.
•
Principal amount (upon which semi-annual coupon
payments are based) is adjusted twice per year in
accordance with the Consumer Price Index (CPI-U).
•
At maturity, pays adjusted principal or par, whichever is
greater.
•
TIPS can be used to impute expected rates of inflation in
future periods.
1
Consumer Price Index (CPI-U)
end
Jan
End yr
Dec ave
2
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?
3
Treasury STRIPS Program
•
Separate Trading of Registered Interest and Principal of
Securities.
•
When a Treasury is stripped, each cash flow is used to
construct separate zero-coupon securities denominated in
$1,000 increments.
•
Not created by Treasury Department. Created by any of
the dealers that work with Treasury.
•
At the request of any such dealer, Treasury will procure
separate CUSIP numbers for each strip component.
•
Strips created when sum of parts worth more than the
whole.
•
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://https://www.treasurydirect.gov/govt/reports/pd/mspd/2015/opds092015.pdf
9/30/2015
9/30/2014
9/30/2013
9/30/2012
9/30/2011
9/30/2010
Held by Public
13.12
12.78
11.97
11.26
10.21
9.02
Intragovernmental
Holdings
5.03
5.04
4.76
4.79
4.66
4.53
Total
18.15
17.82
16.73
16.05
14.78
13.55
9/30/2009
9/30/2008
9/30/2007
9/30/2006
9/30/2005
7.55
5.80
5.05
4.84
4.60
4.35
4.21
3.95
3.66
3.33
11.90
10.01
9.00
8.50
7.93
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 $13.12 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 2.35%.
Intergovernmental Holdings are not marketable.
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Social Security (OASI) Trust Fund
2014: $2.728 trillion in trust fund (“piggybank”)
Old-Age and Survivors Insurance
2014: $769 billion in, $714 billion out.
Piggybank forecast to be empty by 2040. Then will only be able to pay
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out about 70% of promised benefits.
OASI Trust Fund (in billions)
http://www.ssa.gov/OACT/STATS/table4a1.html
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Receipts
604
642
675
695
698
677
699
731
743
769
Expendi
Net
tures Increase
442
162
461
181
496
179
516
179
564
134
585
92
604
95
645
86
679
64
714
55
Balance
1,663
1,844
2,024
2,203
2,337
2,429
2,524
2,610
2,673
2,728
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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 a muni with a similar taxable bond
use
iat  ibt (1  t )
where t is marginal tax rate.
• Typically sold as serial bond issues (see pp. 250-51)
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Bearer Bonds (not many left)
12
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 bonds also known euphemistically 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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