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Treasury Bonds• To generate cash the

U.S. Treasury Dept. prints and sells Treasury Bills, Bonds, and other similar types of notes.

Treasury Bonds• Purchasing a

Treasury Note means that you are lending money to the U.S. government. In exchange, the government will pay you back the money with interest.

Treasury Bonds• This is how a

Treasury Note works. – The government will

issue a note with a face value of $1000.

– Your cost for the note is less than $1000, e.g., $990.

– When the note matures, the government pays you $1000.

– The interest you earn is the difference between the $1000 and the price you paid.

Face value: $1000

Your cost:<$1000

Treasury Bonds• The amount of time

needed to earn back the money paid and interest is known as the Maturity.

• Treasury Bills can have Maturities of 3 months or 6 months.

• To calculate the interest earned, use this formula.

FV = Face Value of the NotePP = Purchase Price of the NoteM = Maturity

Treasury Bonds• The Treasury Dept.

auctions Treasury securities several times throughout the year. These include:

– T Bills– Treasury Notes– Treasury Bonds– TIPS

• This table shows the results of a recent Treasury auction.

• Let’s look at a 13- week T Bill.

Treasury Bonds• Using the interest

formula, we find that the interest on the T Bill is 0.035%.

• This is not a very high percent. Why is it so low?

FV = $1000PP = $999.91M = Maturity

Treasury Bonds• In fact, the yield on all

Treasury securities varies. This chart shows the change in 3-month T Bills from 2007 to 2011.

• Note how the interest rates have significantly decreased.

• This reflects the slowdown in the U.S. economy over the past few years.

Treasury Bonds• Treasury securities

are still a good investment for a number of reasons:

– Backed by the U.S. government

– A guaranteed return on investment