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Chapter 6
Treasury and
Agency Securities
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Inc. Publishing as Prentice Hall 6-2
Learning Objectives
After reading this chapter, you will understand
the different types of securities issued by the Treasury
the operation of the primary market for Treasury securities
the role of government dealers and government brokers
the secondary market for Treasury securities
how Treasury securities are quoted in the secondary
market
the zero-coupon Treasury securities market
the major issuers in the federal agency securities market
the functions of government-sponsored enterprises that
issue securities
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Treasury Securities
Two factors account for the prominent role of . Treasury
securities:
i. volume (in terms of dollars outstanding) 交易量
流动性
The Department of the Treasury is the largest single issuer of
debt in the world.
The large volume of total debt and the large size of any single
issue have contributed to making the Treasury market the
most active and hence the most liquid market in the world.
The dealer spread between bid and ask price is considerably
narrower than in other sectors of the bond market.
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Treasury Securities (continued)
Types of Treasury Securities
The Treasury issues both marketable and non-marketable
securities.
Our focus here is on marketable securities. (可流通证券）
Marketable Treasury securities are categorized as fixed-
principal securities （固定本金证券） or inflation-
indexed securities. （与通货膨胀指数挂钩的证券）
Fixed-income principal securities include:
i. Treasury bills 国库券
ii. Treasury notes 中期国债
iii. Treasury bonds 长期国债
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Treasury Securities (continued)
Types of Treasury Securities
Treasury bills are issued at a discount to par value, have no
coupon rate, and mature at par value.
The current practice of the Treasury is to issue all securities
with a maturity of one year or less as discount securities.
As discount securities, Treasury bills do not pay coupon
interest.
o Instead, Treasury bills are issued at a discount from their
maturity value; the return to the investor is the difference
between the maturity value and the purchase price.
没有利息，折价发行
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Treasury Securities (continued)
Types of Treasury Securities
All securities with initial maturities of two years or more
are issued as coupon securities.
Coupon securities are issued at approximately par and, in
the case of fixed-principal securities, mature at par value.
Treasury coupon securities issued with original maturities
of more than one year and no more than 10 years are
called Treasury notes.
Treasury coupon securities with original maturities greater
than 10 years are called Treasury bonds.
按期付息，按照未来利息和本金折现定价
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Treasury Securities (continued)
Types of Treasury Securities
Callable bonds have not been issued since 1984.
On January 29, 1997, the . Department of the Treasury
issued for the first time Treasury securities that adjust for
inflation.
These securities are popularly referred to as Treasury
inflation protection securities, or TIPS. 通货膨胀保护国
债
The principal that the Treasury Department will base both
the dollar amount of the coupon payment and the maturity
value on is adjusted semiannually. 每半年调整一次
This is called the inflation-adjusted principal.
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Treasury Securities (continued)
The Treasury Auction Process
The Public Debt Act of 1942 grants the Department of
the Treasury considerable discretion in deciding on the
terms for a marketable security.
An issue may be sold on an interest-bearing （附息）
or discount （议价） basis and may be sold on a
competitive or other basis, at whatever prices the
Secretary of the Treasury may establish.
However, Congress imposes a restriction on the total
amount of bonds outstanding.
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Treasury Securities (continued)
The Treasury Auction Process
Treasury securities are sold in the primary market （一级
市场） through sealed-bid auctions. （拍卖程序）
Each auction is announced several days in advance by
means of a Treasury Department press release or press
conference.
The announcement provides details of the offering,
including the offering amount and the term and type of
security being offered, and describes some of the auction
rules and procedures.
Treasury auctions are open to all entities.
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Treasury Securities (continued)
The Treasury Auction Process
The Treasury auctions securities on a regular cycle Treasury
bills with maturities of 4 weeks, 13 weeks (3 months), and 26
weeks (6 months).
At irregular intervals the Treasury issues cash management
bills （现金管理国库券） with maturities ranging from a few
days to about six months.
The Treasury auctions 2-, 5-, and 10-year Treasury notes.
The Treasury does not issue Treasury bonds on a regular basis.
o The Treasury had issued 30-year Treasury bonds on a regular
basis but suspended doing so in October 2001.
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Treasury Securities (continued)
Determination of the Results of an Auction
The auction for Treasury securities is conducted on a competitive
bid basis.竞争性投标
A noncompetitive bid is submitted by an entity that is willing to
purchase the auctioned security at the yield that is determined by
the auction process. 接受拍卖的收益率
When a noncompetitive bid is submitted, the bidder only specifies
the quantity sought.
The quantity in a noncompetitive bid may not exceed $1 million
for Treasury bills and $5 million for Treasury coupon securities.
A competitive bid specifies both the quantity sought and the yield
at which the bidder is willing to purchase the auctioned security.
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Treasury Securities (continued)
Determination of the Results of an Auction
The highest yield accepted by the Treasury is referred to as the
high yield (or stop-out yield). 最高收益率
Bidders whose bid is higher than the high yield are not
distributed any of the new issue (., they are unsuccessful
bidders). 高于最高收益率竞标失败
Bidders whose bid was the high yield are awarded a
proportionate amount for which they bid. 低于最高收益率的
首先全额分配，剩下的等于最高收益率的按投标金额比例
配给
Within an hour of the auction deadline, the Treasury announces
the auction results including the quantity of noncompetitive
tenders, the median-yield bid, and the ratio of the total amount
bid for by the public to the amount awarded to the public.
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Treasury Securities (continued)
Secondary Market
The secondary market for Treasury securities is an over-
the-counter market （柜台交易市场） where a group of
. government securities dealers offer continuous bid
and ask prices on outstanding Treasuries.
There is virtual 24-hour trading of Treasury securities.
The three primary trading locations are New York,
London, and Tokyo. （三大国际金融中心）
The normal settlement period for Treasury securities is the
business day after the transaction day (“next day”
settlement).
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Treasury Securities (continued)
Secondary Market
The most recently auctioned issue is referred to as the on-the-run
issue or the current issue.
Securities that are replaced by the on-the-run issue are called off-
the-run issues.
At a given point in time there may be more than one off-the-run
issue with approximately the same remaining maturity as the on-
the-run issue.
Treasury securities are traded prior to the time they are issued by
the Treasury.
This component of the Treasury secondary market is called the
when-issued market, or wi market. 发行前交易市场
When-issued trading for both bills and coupon securities extends
from the day the auction is announced until the issue day.
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Treasury Securities (continued)
Secondary Market
Government dealers trade with the investing public and
with other dealer firms.
When they trade with each other, it is through
intermediaries known as interdealer brokers. 交易商间经
纪人
Dealers leave firm bids and offers with interdealer brokers
who display the highest bid and lowest offer in a
computer network tied to each trading desk and displayed
on a monitor.
Dealers use interdealer brokers because of the speed and
efficiency with which trades can be accomplished.
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Treasury Securities (continued)
Price Quotes for Treasury Bills
The convention for quoting bids and offers is different for
Treasury bills and Treasury coupon securities.
Bids and offers on Treasury bills are quoted in a special way.
Unlike bonds that pay coupon interest, Treasury bill values are
quoted on a bank discount basis, not on a price basis. 银行贴现额
The yield on a bank discount basis is computed as follows:
where Yd = annualized yield on a bank discount basis (expressed as a
decimal), D = dollar discount (which is equal to the difference
between the face value and the price), F = face value and t = number
of days remaining to maturity.
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Treasury Securities (continued)
Price Quotes for Treasury Bills
Example using yield on a bank discount basis:
Consider a Treasury bill with 100 days to maturity, a face
value of $100,000, and selling for $99,100 would be
selling with a dollar discount of D = F – P = $100,000 –
$99,100 = $900. Given D = $900, F = $100,000 and t =
90, the Treasury bill would be quoted at the following
yield:
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Treasury Securities (continued)
Price Quotes for Treasury Bills
The quoted yield on a bank discount basis is not a
meaningful measure of the return from holding a
Treasury bill.
There are two reasons for this:
i. First, the measure is based on a face-value investment rather
than on the actual dollar amount invested.
ii. Second, the yield is annualized according to a 360-day rather
than a 365-day year, making it difficult to compare Treasury
bill yields with Treasury notes and bonds, which pay interest
on a 365-day basis.
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Treasury Securities (continued)
Price Quotes for Treasury Bills （P136）
The measure that seeks to make the Treasury bill quote
comparable to Treasury notes and bonds is called the
bond equivalent yield. 等价债券收率
The CD equivalent yield (also called the money market
equivalent yield) makes the quoted yield on a Treasury
bill more comparable to yield quotations on other
money market instruments that pay interest on a 360-
day basis.
It does this by taking into consideration the price of the
Treasury bill rather than its face value.
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Treasury Securities (continued)
Quotes on Treasury Coupon Securities
Treasury coupon securities are quoted in a different
manner than Treasury bills ─ on a price basis in points
where one point equals 1% of par.
The points are split into units of 32nds, so that a price
of 96-14, for example, refers to a price of 96 and 14
32nds, or per 100 of par value.
The 32nds are themselves often split by the addition of
a plus sign or a number.
In addition to price, the yield to maturity is typically
reported alongside the price.
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Treasury Securities (continued)
Quote No. of 32nds
No. of
64ths
No. of
256ths
Price per
$100 par
91-19+ 19 1 0
107-222 22 0 2
5
109-066 6 0 6
5
Quotes on Treasury Coupon Securities
The following are examples of converting a quote to a price
per $100 of par value:
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Treasury Securities (continued)
Quotes on Treasury Coupon Securities （P136
When an investor purchases a bond between coupon payments, if
the issuer is not in default, the investor must compensate the seller
of the bond for the coupon interest earned from the time of the last
coupon payment to the settlement date of the bond.
This amount is called accrued interest.应计利息
When calculating accrued interest, three pieces of information are
needed:
i. the number of days in the accrued interest period
ii. the number of days in the coupon period
iii. the dollar amount of the coupon payment.
The number of days in the accrued interest period represents the
number of days over which the investor has earned interest.
给出售者补还利息。
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Treasury Securities (continued)
Quotes on Treasury Coupon Securities (p137)
The calculation of the number of days in the accrued interest
period and the number of days in the coupon period begins with
the determination of three key dates: the trade date, settlement
date, and date of previous coupon payment.
The trade date is the date on which the transaction is executed.
The settlement date is the date a transaction is completed.
For Treasury securities, settlement is the next business day
after the trade date.
Interest accrues on a Treasury coupon security from and
including the date of the previous coupon payment up to but
excluding the settlement date.
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Treasury Securities (continued)
Quotes on Treasury Coupon Securities
The number of days in the accrued interest period and
the number of days in the coupon period may not be
simply the actual number of calendar days between
two dates.
For Treasury coupon securities, the day count
convention used is to determine the actual number of
days between two dates.
This is referred to as the actual/actual day count
convention.
AI=8/2 * (184-118)/184
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Stripped Treasury Securities
The Treasury does not issue zero-coupon notes or
bonds.
However, because of the demand for zero-coupon
instruments with no credit risk, the private sector has
created such securities.
The profit potential for a government dealer who
strips a Treasury security lies in arbitrage resulting
from the mispricing of the security.
The process of separating the interest on a bond from
the underlying principal is called coupon stripping.
（剥息）
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Stripped Treasury Securities
(continued)
Zero-coupon Treasury securities were first created in
August 1982 by dealer firms.
The problem with these securities was that they were
identified with particular dealers and therefore reduced
liquidity.
Moreover, the process involved legal and insurance costs.
Today, all Treasury notes and bonds (fixed-principal and
inflation-indexed) are eligible for stripping.
The zero-coupon Treasury securities created under the
STRIPS program are direct obligations of the .
government. 注册的证券本金和利息的分离交易
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Stripped Treasury Securities
(continued)
There may be confusion when a market participant
refers to a “stripped Treasury.”
Today, a stripped Treasury typically means a STRIPS
product.
However, because there are trademark products and
other types of pre-STRIPS zero-coupon products still
outstanding, an investor should clarify what product
is the subject of the discussion.
We can refer to stripped Treasury securities as simply
“strips.” 剥离国债
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Stripped Treasury Securities
(continued)
On dealer quote sheets and vendor screens STRIPS are
identified by whether the cash flow is created from the
coupon (called ci), principal from a Treasury bond
(called bp), or principal from a Treasury note (called
np).
Strips created from the coupon are called coupon strips
息票剥离国债and those from the principal are called
principal strips. 本金剥离国债
The reason why a distinction is made between coupon
strips and principal strips has to do with the tax
treatment by . entities, as discussed in the next
section.
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Stripped Treasury Securities
(continued)
Tax Treatment
A disadvantage of a taxable entity investing in stripped Treasury
securities is that accrued interest is taxed each year even though
interest is not paid.
o Thus these instruments are negative cash flow instruments until the
maturity date.
o They have negative cash flow because tax payments on interest
earned but not received in cash must be made.
Reconstituting a Bond
Reconstitution is the process of coupon stripping and reconstituting
that will prevent the actual spot rate curve observed on zero-coupon
Treasuries from departing notably from the theoretical spot rate curve.
o As more stripping and reconstituting occurs, demand and supply will
cause rates to return to their theoretical spot rate levels.
o 债券重构是一种套利行为: 如果剥离的一揽子零息国债与对应的
付息国债价格不一致，就存在机会。
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Federal Agency Securities
The . Congress has chartered entities
to provide funding support for the
housing and agricultural sectors of the
. economy, as well as to provide
funding for specific . government
projects.
The market for the debt instruments
issued by these government-chartered
entities is called the federal agency
securities market. 联邦政府机构证券
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Federal Agency Securities
(continued)
There are several types of government-chartered
entities.
i. One type is a government-owned corporation. 政府所有
企业
ii. Another type of government-chartered entity is a
government-sponsored enterprise (GSE). 政府资助企业
GSEs are divided into two types.
o The first is a publicly owned shareholder corporation.
o There are three such GSEs: the Federal National Mortgage
Association (“Fannie Mae” 房利美), the Federal Home Loan
Mortgage Corporation (“Freddie Mac” 房地美), and the
Federal Agricultural Mortgage Corporation (“Farmer Mac” 联
邦农业信贷银行).
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Federal Agency Securities
(continued)
The price quotation conventions for GSE securities will vary
between types of debt.
Short-term GSE discount notes are quoted on a yield basis, the
same as that for Treasury bills explained earlier in this chapter.
The most liquid GSE issues are generally quoted on two
primary bases:
i. a price basis, like Treasury securities; that is, the bid and ask price
quotations are expressed as a percentage of par plus fractional
32nds of a point
ii. a spread basis, as an indicated yield spread in basis points, off a
choice of proxy curves or issue.
Federally related institutions are arms of the federal
government and generally do not issue securities directly in the
marketplace.
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Federal Agency Securities
(continued)
Tennessee Valley Authority (TVA) 发行电力债券
The TVA was established by Congress in 1933 primarily to provide
flood control, navigation, and agricultural and industrial development.
The TVA issues a variety of debt securities in . dollars and other
currencies.
The debt obligations issued by the TVA may be issued only to provide
capital for its power program or to refund outstanding debt
obligations.
TVA debt obligations are not guaranteed by the . government.
o However, the securities are rated triple A by Moody’s and Standard
and Poor’s.
o The rating is based on the TVA’s status as a wholly owned corporate
agency of the . government and the view of the rating agencies of
the TVA’s financial strengths.
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Federal Agency Securities
(continued)
Fannie Mae 房地美
In the 1930s, Congress created a federally related institution, the
Federal National Mortgage Association, popularly known as
“Fannie Mae,” which was charged with the responsibility to
create a liquid secondary market for mortgages.
Fannie Mae was to accomplish this objective by buying and
selling mortgages.
In 1968, Congress divided Fannie Mae into two entities:
i. the current Fannie Mae
ii. the Government National Mortgage Association (popularly known as
“Ginnie Mae”).
Ginnie Mae’s function is to use the “full faith and credit of the
. government” to support the market for government-insured
mortgages.
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Federal Agency Securities
(continued)
Freddie Mae
In 1970, Congress created the Federal Home Loan
Mortgage Corporation (Freddie Mac). 房利美
The reason for the creation of Freddie Mac was to provide
support for conventional mortgages. These mortgages are
not guaranteed by the . government.
Freddie Mac issues Reference Bills, discount notes,
medium-term notes, Reference Notes, Reference Bonds,
Callable Reference Notes, Euro Reference Notes (debt
denominated in euros), and global bonds.
In 2001, Freddie Mac also began issuing subordinated
securities (called Freddie Mac Subs).
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Federal Agency Securities
(continued)
Farmer Mac
The Federal Agricultural Mortgage Corporation (Farmer Mac)
provides a secondary market for first mortgage agricultural real
estate loans.
It was created by Congress in 1998 to improve the availability
of mortgage credit to farmers and ranchers as well as rural
homeowners, businesses, and communities.
It does so by purchasing qualified loans from lenders in the
same way as Freddie Mac and Fannie Mae.
Farmer Mac raises funds by selling debentures and mortgage-
backed securities backed by the loans purchased. The latter
securities are called agricultural mortgage-backed securities
(AMBS). 农业住房抵押支持证券
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Federal Agency Securities
(continued)
FHLBanks
The Federal Home Loan Bank System (FHLBanks) consists of the
12 district Federal Home Loan Banks and their member banks.
The Federal Home Loan Bank Board was originally responsible
for regulating all federally chartered savings and loan associations
and savings banks, as well as state-chartered institutions insured
by the Federal Savings and Loan Insurance Corporation.
These responsibilities have been curtailed since 1989. The major
source of debt funding for the Federal Home Loan Banks is the
issuance of consolidated debt obligations, which are joint and
several obligations of the 12 Federal Home Loan Banks.
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Federal Agency Securities
(continued)
FHLBanks 联邦住房贷款银行系统
The Federal Home Loan Bank System (FHLBanks) consists of the
12 district Federal Home Loan Banks and their member banks.
The Federal Home Loan Bank Board was originally responsible
for regulating all federally chartered savings and loan associations
and savings banks, as well as state-chartered institutions insured
by the Federal Savings and Loan Insurance Corporation.
These responsibilities have been curtailed since 1989. The major
source of debt funding for the Federal Home Loan Banks is the
issuance of consolidated debt obligations, which are joint and
several obligations of the 12 Federal Home Loan Banks.
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Federal Agency Securities
(continued)
FFCBS联邦农业信贷银行系统
The purpose of the Federal Farm Credit Bank System
(FFCBS) is to facilitate adequate, dependable credit and
related services to the agricultural sector of the economy.
The Farm Credit Bank System consists of three entities: the
Federal Land Banks, Federal Intermediate Credit Banks, and
Banks for Cooperatives.
i. Prior to 1979, each entity issued securities in its own name.
ii. Starting in 1979, they began to issue debt on a consolidated
basis as “joint and several obligations” of the FFCBS.
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Federal Agency Securities
(continued)
Resolution Trust Corporation
The 1987 legislation that created FICO 融资公司 did not go far
enough to resolve the problems facing the beleaguered savings
and loan industry.
In 1989, Congress passed more comprehensive legislation, the
Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA).
Farm Credit Financial Assistance Corporation (FACO)
农业信贷财务援助公司
In the 1980s, the FACO faced financial difficulties because of
defaults on loans made to farmers.
The defaults were caused largely by high interest rates in the
late 1970s and early 1980s and by depressed prices on
agricultural products.
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Federal Agency Securities
(continued)
GSE Credit Risk 存在信用风险
With the exception of the securities issued by the Farm
Credit Financial Assistance Corporation, GSE
securities are not backed by the full faith and credit of
the . government, as is the case with Treasury
securities.
Consequently, investors purchasing GSEs are exposed
to credit risk.
The yield spread between these securities and Treasury
securities of comparable maturity reflects differences
in perceived credit risk and liquidity.
