UNIVERSITETI “ALEKSANDËR MOISIU”

FAKULTETI I STUDIMEVE TË INTEGRUARA

ME PRAKTIKËN (FASTIP) BANK MANAGEMENT

FIRST YEAR

Project Work I

Topic:

Treasury Bonds: Investment in government security

Submitted by: Enos Dauti

Date: 30.08.2010

2

1.Introduction

A treasury bond is a negotiable, coupon-bearing debt obligation issued by the

government and backed by its full faith and credit, with ranging maturity from one to thirty

years from the date of issue.1 Also called government security, this derives from the fact

that they have the security of the government in paying them back. Treasury bonds

comprise part of the financial instruments in the hands of the state to manage the economic

environment. Moreover, treasury bonds are referred as government debt, because the it sells

its debt to finance its deficit. In addition, at the maturity period of the bond the government

pays the intended yield as well as the principal invested arisen from the government’s

received revenue.

Nevertheless, out of such statements there are some simple questions arising. What

was the trigger of initiation of such a monetary instrument to be invented? Who does it

benefit the most? Would economy be the same without its usage? And lastly, is it possible

that once the government implemented such a tool to simply cease its usage, pay back all

the investors, and have sufficient budget to continue project financing without borrowings?

1.2 Historical background to public debt

Sophisticated as it is, the state issued bond, is believed to be part of today’s modern

world economy, but regarding to historical records, it dates back far from what is

commonly known. It is in the early Middle Age, in the twelve century, when bills of

exchange, with transferability to third parties through endorsement, were used2. It was the

simple fact of taxation – of more or less predictable revenue streams – that provided the

earliest system of public debt in medieval Italy. The Venetian public debt, which originated

in the twelfth century, was secured on the state’s salt monopoly, the revenues of which

were earmarked for debt service and redemption. In the fourteenth century the increasing

1 Treasury Bond definition, http://www.investorwords.com/5061/Treasury_Bond.html

2 Ferguson, N., The Cash Nexus; Money and Power in the Modern Word,1700 – 2000, pg. 107.

3

use of forced loans (prestiti) as a form of taxation further increased the importance of the

debt.3

As it is usually happens, when a new instrument regardless of the nature of use, and

with reference to the fact that it becomes an indivisible part of the aspects of life it is used,

it evolves in accordance to the frequent changing needs of the demand and supply of this

same instrument. In terms of the public debt, its management developed accordingly. An

important development here was transferability, where in Florence; the communal debt was

systematically increased by the fiscal heavy reliance of the forced loans.4 What we see so

far is the fact that the government, being aware of its power and competence in regard to

the laws they issued, provided itself with a supporting policy to finance their budget deficit,

and saw public borrowing as an inevitable tool to manage its portfolio.

1.3 Development approach to current days

However, with the evolution of the society, and the radical changes occurred in the

political systems up to the recent days, with regard to the current legal system, it is

impossible and illegal to impel lenders to invest in the government deficit. In addition, what

we see as today’s government security is the Treasury bond, which with connection to the

principal invested, it is possible to gain interest accordingly, and this way the government

attracts investors5. This is in contrast to the initial usage, where people were compelled to

―buy‖ the budget deficit. When the government needs to borrow money, it issues bonds in

various denominations or face values. The face value is returned to you on the bond's future

maturity date and you get paid interest in the interim.6

3 Ferguson, N., cited, pg.107

4 Ferguson, N., cited, pg.108

5 Government Bond, http://en.wikipedia.org/wiki/Government_bond

6 Government Bond, National Bank; Financial.

4

In other words, it builds up its reputation and confidence in people on its ability to

pay back and rewarding its investors with the received yield. Furthermore, it provides itself

and others with mutual reliance in future investments.

2. Operating with government security

Treasury bonds are issued by the government in order to pay for government

projects. The money paid out for a Treasury bond is essentially a loan to the government.

As with any loan, repayment of principal is accompanied by a fixed interest rate. These

bonds are guaranteed by the 'full faith and credit' of the government, meaning that they are

extremely low risk (since the government can simply print money to pay back the loan)7.

The most real risk for investors comes from the decrease of the real value of profit.

In other terms, from the increase of the inflation rate, or the depreciation of the ALL

compared to other foreign currencies8.

2.1 Open Market Operation

Open market operations are one of three basic tools used by the Federal Reserve (or

any other Country’s Central Bank) to reach its monetary policy objectives. The execution

of OMOs in the "open market"—also known as the secondary market for securities

purchases—is the Federal Reserve's most flexible means of carrying out its objectives9.

Differently put, this means that it is through OMO that the state provides the instruments to

conduct its predicted monetary policy to achieve the desired outcome on one’s country

economic environment.

The money market—which includes the federal funds market—provides the natural

point of contact between the Federal Reserve and the financial system. The money market

is a term used for wholesale markets in short term credit or IOUs, comprising debt

instruments maturing within one year. The market is international in scope and helps in

7 Treasury Bonds, www.Investorguide.com

8 Kaiku, E., Treasury Bonds, Hapesire, April 16 2007,pg 22. 9 Open market operations, http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html

5

economizing on the use of cash or money.10

Open market operations by the Federal

Reserve involve the buying and selling of government securities in the secondary market in

which previously issued securities are traded.11

In addition, what we see as beneficiary to

the state is the way it provides itself with the funds to finance its budgeted projects and

moreover prevent economic crumps due to lack of money.

The government sells Treasury bonds by auction in the primary market, but they can

also be purchased through a broker in the secondary market. A broker will charge a fee for

such a transaction, but the government charges no fee to participate in auctions. Treasury

bonds are marketable securities, meaning that they can be traded after the initial purchase.

Additionally, they are highly liquid because there is an active secondary market for them.

Prices on the secondary market and at auction are determined by interest rates. Treasury

bonds issued today are not callable, so they will continue to accrue interest until the

maturity date.12

2.2 Classification of bonds

The government issues large variety of securities as part of financial instruments,

that will contribute to finance the occurring budget deficit. There are three main

distinguishable types of bonds in accordance to their period to maturity. Furthermore, this

kind of classification is not only used for the simplicity of creating taxonomies under which

to define the terms and conditions of the bond issued.

What is seen applicable in this aspect is the fact of who’s to benefit. In such terms,

this means that the state organizes the securities issued in accordance to its needs, whether

they are long – run, or short – run needs. Yet, it also provides appealing diversification to

investors to meet their need on the length of time they are willing to lend their money to the

state, and the proximity of time in which they desire to obtain back the principal invested to

10

Akhtar, M. A., Understanding open market operations, pg.7. 11

Akhtar, M. A., Cited, pg.35 12

Treasury Bonds, www.Investorguide.com

6

re – make use of it. Despite the fact that bonds seem appealing to the point of mutual

satisfaction, in case the government would not be in necessity of liquidity, it is believed that

the bonds issuing would not occur in the first place. There are three types of securities

issued by the U.S. Treasury. These are distinguished by the amount of time from the initial

sale of the bond to maturity.

Treasury bonds

These securities have the longest maturity of any bond issued by the U.S. Treasury,

from 10 to 30 years. The 30-year bond is also called the "long bond." Denominations range

from $1000 to $1 million. T-bonds pay interest every 6 months at a fixed coupon rate. As

mentioned above, these bonds are not callable, but some older T-bonds available on the

secondary market are callable within five years of the maturity date.

Treasury notes

T-notes have maturities between 1 and 10 years. Denominations range from $1000

to $5000 and are determined by the amount of time to maturity. Like T-bonds, these

securities pay interest semi-annually at a fixed coupon rate.

CPI-indexed Treasury Notes (TIPS)

TIPS are inflation-indexed securities issued by the U.S. Treasury in an effort to

widen the selection of government securities available to investors. The notes have a 10

year maturity and pay interest at a fixed rate. The principal increases with the inflation rate,

which in turn increases future interest payments. One danger associated with investing in

TIPS is that taxes are due on the increased principal before maturity when the investor

gains access to the principal. In times of high inflation, tax payments could even exceed the

interest income earned by the note.

7

Treasury Bills

T-bills are available with maturities of 13 weeks, 26 weeks and 52 weeks. They are

purchased at a discount to their $10,000 face value, and the full amount is received at

maturity (making them zero-coupon). The bills are sold at auction where the price of sale is

determined by how much the bill is worth on the date of issue, which depends mainly on

interest rates.13

2.3 Practical demonstration

An attraction with bonds is that you don't have to wait until maturity to earn your

full return. You can sell them in the bond market before they mature - and hopefully profit

doing so. Whether you profit will mostly depend on what has happened to general interest

rates since you bought the bond. If rates have come down, you will likely be able to sell the

bond for more than you paid. If they've risen, however, you'll probably lose on the sale. Say

you pay face value for a $1,000, 10-year bond paying 10%. Two years later, you decide to

sell when interest rates have dropped and similar bonds are yielding 8%. Instead of selling

your bond for $1,000, you can sell it for more because it's 10% coupon is attractive. So you

sell the bond for $1,085, giving you an $85 profit that pushes up your return to 14.25%.

Eight years later, the person who bought the bond will get back its $1,000 face value,

leaving a loss of $85. Spread out over the bond's remaining eight years, that loss reduces

the buyer's return to about 8%. Other factors besides interest rates can affect bond prices,

such as the issuer's credit rating, the term to maturity, and the bond's coupon rate.14

What is seen as the logic behind such open market operation is the willingness to

risk on the predictability of the interest rate. If the bond yield is higher than that of the

market, there is an evident profit on the side of the one who initiates the first instance of

selling. On the other hand, the second buyer has to risk on the fact that the market interest

will remain in such proportions to gain the desired reward out of the yield or if odds are that

he will be in need of liquidity. In the case that the market interest increases beyond the one

13

Treasury Bonds, www.Investorguide.com 14

Government Bond, National Bank; Financial.

8

printed on the bond, and the case is that if same buyer needs immediate liquidity, he can

sell it for less that he actually paid and resulting in loss. The contrary would occur if the

interest is constantly changing in negative proportions; it may be the case for him to decide

to resell the bond in order for him to make profit out of the bond, without waiting its

maturity.

3. Albanian’s investments retrospective

Out of historical records it is known that Albania has been under a dictatorship

regime for almost fifty years, and as a result its economy was far from the competitive

market. In accordance, economic knowledge was not applicable to all the population of the

country. In addition, there was substantial lack of information regarding financial

institutions, economic approaches as well as reasoning in such terms. However, it was not

until the late 90’s that Albania changed its form of regime, making so a giant leap from

total isolation to direct democracy.

When Albania started the transition from central planning to a market economy, it

was the poorest and most isolated and backward country in Europe. For centuries, Albania

had been largely unknown and inaccessible, and, from 1945 to 1985, its isolation was

compounded by the rigid communist dictatorship, which eliminated almost all forms of

private property and virtually cut the country off from outside influences and information.15

The banking industry remains the largest and the most development segment of the

Albanian financial market. The banking sector plays an important role in economy but it

cannot be considered isolates from historical political and economic environment16

.

What is seen as inevitable, is the gap of development between the two kinds of

government. A gap that would reflect in the years to come as the worst case scenario in

managing the market.

15 Jarvis, C., The rise and the fall of Albania’s pyramid scheme. 16

Tushaj, A., Market Concentration in the Banking Sector: Evidence from Albania, pg. 5

9

3.1 Bad investments

Initially, the banking sector before the ’90 was a mono bank. Bank deposits were

the only officially available savings / investment instruments for individuals in socialist

Albanian economy17. After the fall of communism, the young, yet vibrant private sector

was generating an increasing amount of domestic savings, along with remittances from

about 400,000 Albanians working abroad, mainly in Greece and Italy. In 1995 private

savings reached almost 15 percent of GDP, or $350 million (up from practically zero, two

or three years earlier). Those savings, combined with remittances from abroad, totaled more

than $600 million in 1995 and more than $700 million in 199618

.

Deriving from the fact that the overall conditions were led by the unknown, it was

easier for ―differently‖ skilled people to create informal financial institutions and to

convince others to deposit their money, which consequently came the rise of the Pyramid

schemes. The pyramid scheme phenomenon in Albania is important because its scale

relative to the size of the economy was unprecedented.19

The new class of inexperienced account owners became easy targets for swindlers,

who promised exorbitant interest rates for those who joined their schemes. At the beginning

they kept their promises, paying their obligations from the next wave of investors' money.

Deriving from the fact that these kind of deposit – taking individuals appeared for

the first time, regardless from the nature of their intention, they had to be fair to the

depositors. In such terms, they returned the promised interest and the amount of money to

the first depositors in order to build up confidence, and to attract more to come.

17 Tushaj, A., Cited, pg.5 18 Elbirt, C., Albania under the shadow of Pyramids. 19

Jarvis, C., cited.

10

This is why such schemes are called pyramid20

schemes: the bottom layers of

deposits must grow fast in order to keep the system running21

. The wide appeal of Albania's

schemes can be attributed to several factors, including Albanians' unfamiliarity with

financial markets; the deficiencies of the country's formal financial system, which

encouraged the development of an informal market and, within this market, of the pyramid

schemes; and failures of governance.22

The informal lending companies were initially regarded as making an important

economic contribution. However, deposit-taking companies invested on their own account

instead of making loans. These companies were the ones that turned into pyramid

schemes.23

3.2 How did the schemes operate?

In a typical pyramid scheme, a fund or company attracts investors by offering them

very high returns; these returns are paid to the first investors out of the funds received from

those who invest later. The scheme is insolvent—liabilities exceed assets—from the day it

opens for business. However, it flourishes initially, as news about the high returns spreads

and more investors are drawn in. Encouraged by the high payouts, and in some cases by

showcase investments and ostentatious spending by the operators, still more people are

drawn in, and the scheme grows until the interest and principal due to the early investors

exceeds the money paid in by new investors. To attract new investors, a scheme may raise

interest rates, but the larger interest payments soon force it to raise rates again. Eventually,

the high rates begin to arouse suspicion or the scheme finds itself unable to make interest

payments. When investors try to get their money out, they discover the truth about the

scheme, whose demise is swift—and usually accompanied by acts of outright theft by the

operators, if they are not caught first24

.

20

See picture 1 Page 18 21

Elbirt, C.,cited. 22

Jarvis, C., cited. 23

Jarvis, C., cited. 24

Jarvis, C., cited.

11

It seems obvious that the continuous raise of the interest rates would imply that the

scheme operator would have to increase the interest rate of return revenue constantly in

order to attract more investors in order pay the previously claimed interest. In a scaling

approach, it would come to the case that he/she would actually bring the interest rate up to

100% or more, due to competition, and at the yield to maturity it would be impossible to

pay back the investors. As result, such a fear would arise from the same word of mouth that

brought its popularity in acquiring the populations found, the very same would make

people to ―Run at the scheme‖. In addition with its liabilities exceeding its assets, not only

he/she would make no profit, despite the result of losses is clearly eminent, but what would

be the results in terms of paying back? How would people react ?

Experts and other professionals predicted what was going to happen and warned the

government of time, the case was sent to a trial, but the frail legal framework favored such

a scheme25

.

From this experience, the legal framework was prepared and empowered to prevent

such a scenario from repeating. The bank of Albania is the only financial institution that

plays the regulatory role.

Out of the traumatic experience in the 1997, with the collapse of the pyramid

schemes that dried up the population’s savings overnight, Albania was induced to anarchy,

where the people reacted very violently26

. Government revenues collapsed as customs posts

and tax offices were burned27

.

Preventing state’s income would mean an inevitable end. The lack of revenue would

leave the state out of funds to invest in the future prosperity of its own country. Somehow,

this can be associated with the fact that the population blamed the government for their own

losses, and if they did not have any assets, the government would neither.

After 1997 crisis, the macroeconomic environment led to important changes in

Albanian banking sector which was involved in liquidation, restructuring, privatization and

25 Elbirt, C.,cited. 26 Fuster, T., The Truth and the Surface in the Albanian economy. Shekulli. 27

Jarvis, C., cited.

12

acquisition activities of some banks28

. This, in order to build up confidence and to develop

the sector of financial institutions.

4. Central Bank’s role

Most of the nations’ central banks are responsible for formulating and implementing

monetary policy. The formulation of monetary policy involves developing a plan aimed at

pursuing the goals of stable prices, full employment and, more generally, a stable financial

environment for the economy. In implementing that plan, the central banks make use of

tools of monetary policy to induce changes in interest rates, and the amount of money and

credit in the economy. Through these financial variables, monetary policy actions

influence, albeit with considerable time lags, the levels of spending, output, employment

and prices29

.

In order to achieve its final objective Bank of Albania sets the operational

framework of monetary policy instruments used to intervene in the money market. The

instruments employed for such a purpose include: the instruments used in the open market

operations, standing facilities and other liquidity providing instruments30

.

The attempts to develop this market have been focused on the formulation of laws

and constructions of institutions that will participate in it. The result is: there are no shares

listed in the stock market and an official stock market doesn’t exit. The only securities that

are trading are T-bills. In absence of stock exchange, T-bills are traded from Bank of

Albania .Thus T-bills activity evaluates as indicator of competition.31

4.1 Treasury bills as Albania’s monetary policy

28 Tushaj, A., Cited, pg.23 29 Akhtar, M. A., Cited, pg.1 30 Monetary Policy, Bank of Albania 31 Tushaj, A., Cited, pg.20

13

When the government wants to initiate a development project, in the condition of

finding itself in budget deficit, it issues IOU-s in order to finance the project. The bond

issued by the Albanian government have a maturity of one year and are represented by the

Ministry of Finance, and kept in a registry form. Those are debt instruments through which

the government borrows from the public.32

It is also helpful to understand the country’s condition in terms of demographic

aspects, deriving from the fact that part of Albanians income come from the relatives

abroad. In addition, when seeing the Albanian market operate, it can easily be noticed that

three different currencies are mass used (the US Dollar, the Euro, and the Lek). Out of such

statement, it is the central bank’s responsibility to provide assistance in managing the

domestic currency and its effects on the overall economy.

4.1.1 Managing public debt

In the current days, budget revenues maintained a slower rate than expenditure due

to the slower economic growth rate33

. Consequently, the additional budget expenditure was

financed through the use of privatization receipts and the higher public borrowing. This

policy has exerted pressure over the increase of Government debt securities’ interest rates

of long maturity term34

. It seems obvious, that so far the government is in quest of funds

and it appeals to its depositors through the increase of the interest rate. The government, in

order to diversify on the source of the funds required, does not only rely on the internal

market. Additionally, the influence of fiscal policy on the domestic monetary markets was

more moderate, since the public debt was to a large extent borrowed from the international

capital markets35

.

32 Kaiku, E.,cited, pg 22. 33 Monetary policy Statement for the third quarter of 2009, BoA, pg.9. 34

Monetary policy Statement, cited, pg.9. 35 Monetary policy Statement, cited, pg.9

14

4.1.2 Liquidity and currency management

In order to achieve the desired result of the money in circulation, the BoA

implements certain policies to either tighten or loose the money in circulation. In this

content, it is necessary to claim the bank’s role in managing the foreign currencies in the

domestic market.

The Bank of Albania considers that the stabilization of the banking system’s

liquidity and balance sheet indicators will pave the way for the lending process. In this

context, the Bank of Albania has been engaged in an active role in terms of stimulating

demand and supply with funds. The relaxation of monetary conditions will fuel the growth

of business and consumer demand for funds, while the Bank of Albania’s injection of

liquidity will assist the banking system in meeting the demand for funds in quantitative

terms. The Albanian banking system should understand its role rightly and transmit the

relaxation of monetary policy in economy completely and rapidly. On the other hand, a

lower pressure of the fiscal sector over the domestic financial markets will in the future

lower the risk premium in economy, will create more room for private sector lending and

will facilitate the smoothing out of the interest rate curb in favor of lowering the cost of

credit further. The efficiency of the monetary policy decision will depend on the market

and its participants’ behavior, wherein fiscal policy plays a key role36

.

It is in this extent, that the management of the monetary instruments becomes clear.

BoA, through the decrease of the interest rate on the government securities, discourages

investors from applying to the states auctions and as a result leaving considerate amount of

liquidity in circulation. In such terms, the interest rate becomes competitive to that of the

second level banks and inducing depositors to invest in the conventional deposit. By doing

so, the liability side of the second level banks increases, thus providing ample funds to be

lent out of credit and to raise the liquidity amount.

36

Monetary policy Statement, cited, pg.11

15

When it comes to the currency management, BoA, takes under consideration the

seasonal development of currency’s circulation in the domestic market. In addition to the

constant monitoring it does due to the fact that the domestic market makes use of other

currencies as well. It happens so, partly because Albania is periodically visited by

emigrants which come and increase the foreign currency, and partly because the merchants

to prevent themselves from the ever changing rates of exchange, trade their merchandise in

the currency they initially bought it.

It is a tendency of the domestic currency to depreciate in length between July and

August in the foreign exchange domestic market37

. Out of this statement it is obvious that

in this period there is and excessive demand for the domestic currency, and as a result of

such liquidity, comes the depreciation of the ALL. If this fact affects other spheres of the

overall economy, out of the scope predicted for such a tendency, the state provides bonds to

tighten the liquidity in circulation. Moreover, this is also done in regard to the economic

goal that the central bank wants to achieve for the period.

5. Government security as a mean of personal investment

The investment in government bond is done through an auction. The participants of the

auctions might be banks, financial and non-financial institutions, businesses as well as

foreign native individuals38

. All tradable bonds are ALL indexed instruments. The main

difference is that T-Bills have maturities of less than one year while T-Notes have

maturities of more than one year. If you hold T-Bills and Government Bonds until maturity,

payment of both principal and interest is guaranteed. Thus, it carries features listed as

follows:

T-Bills and T-Notes are short and long-term government borrowing instruments.

They are guaranteed by the Albanian Government.

They provide fixed returns (if you invest your money till due maturity) and are

liquid instruments.

In a volatile market where the interest rates are going up, there is risk.

37 Monetary policy Statement, cited, pg.18 38 Kaiku, E., cited.

16

Investing on securities is not like investing on time deposit. It is possible that you

lose a part of your principal amount if you cannot hold securities till their due

maturity.

T-Bills are sold at a discount and the gain at maturity is known in advance.

T-notes have coupons. Coupon-bearing T-notes are issued at fixed or floating

interest rates.

Coupon payments of T-Notes are done semi-annually (on every 6-months)

These instruments may be bought or sold before the original due maturity at current

market prices.

T-Bills can be converted to cash at any time. They may be sold on the secondary

market before maturity39

.

5.2 Competing conventional deposits

The high risk premium on long maturity terms and the existence of a shallow

financial market were the rationale behind the high Government securities’ long-term

yields. On the other hand, the high yields attracted the individuals’ investment in this

market, hence providing them with an alternative instrument to keep their savings and at

the same time, increasing the share of budget deficit financing from this item40

.

In recent years, the Albanian banking system is characterized by a continued

increased trend, both in terms of number of banks and in the expansion of banking activity.

These trends are accompanied by an increase of lending activity and expansion of the range

of products offered by banks, too. At the end of 2007, there were 17 second level banks on

banking market41

. Additionally, there is a wide range of financial institutions competing

with each other, in order to attract depositors with competing interest rates. As a result, in

such small counrty as Albania, and with the previously stated experience on investment,

many depositors are yet again skeptical to rely on the banking system, or non-state financial

institution, in spite of the fact that it is the BoA’s responsibility to monitor and to alter the

key interest rate.

39 Investments, T-bills/T-notes, http://bkt.com.al/409.aspx 40

Monetary policy Statement, cited, pg.10 41

Tushaj, A., Cited, pg.12

17

In a nutshell, when it comes to invest in financial institutions, depositors in Albania

are more prone to be attracted to the government security rather than the conventional

deposits. It is commonly taken for granted that the state is default free, and as a result

depositors have the security of the state that they will be paid back. This, for the fact that,

as stated in the previous paragraphs, the state can simply print money to pay people back.

6. Conclusion

In conclusion, it is to be said that governments, through the recorded history, have

made use of government security to finance its budget deficit, to acquire funds for future

projects, and to manage the monetary policy. The government’s treasury, be it: bond, bill

or even note, as part of the monetary instruments, has well – defined features and usage in

accordance to the needs of the issuer. Nevertheless, the needs of the issuer are related to the

results desired to perform in the domestic economic environment, as part of its

responsibility in managing the changing factors and variables arising from economic trends,

operations and forecasts.

In an individual approach, the government security is seen as a risk - free deposit

investment, due to the security and faith they have in the government to pay them back.

Secondly, what is more appealing to them is the higher return rate in contrast to the

conventional deposit. In addition, what repels depositors from investing elsewhere is the

traumatic experience of the previous economic collapse, thus investing in the government

security is both, highly profitable, safe, and psychologically comfortable.

18

7. Picture 1. Graphical Scheme of the Pyramid

19

Abbreviations page

BoA – Bank of Albania; Albania’s central bank

GDP – Gross Domestic Product

T – Bond – Treasury bond

T – Bill – Treasury bill

IOU – I Owe You; Government security

OMO – Open Market Operation

ALL – Albanian Lek

20

List of reference

Akhtar, M., A., Understanding Open Market Operations, pg. 1; 7; 35.,

http://research.stlouisfed.org/aggreg/meeks.pdf, Accessed on: 1st

of August 2010.

Elbirt, C., Albania under the shadow of Pyramids,

http://www.worldbank.org/html/prddr/trans/so97/albania2.htm

Accessed on: 4th

of August 2010.

Ferguson, N., The Cash Nexus; Money and Power in the Modern Word,1700 – 2000, pg.

107; 108.,

http://www.scribd.com/doc/25189824/Ferguson-Niall-The-Cash-Nexus-Money-and-

Power-in-the-Modern-World-1700-2000-Basic-Books-2001, Accessed on: 3rd

of August

2010.

Fuster, T., The Truth and the Surface in the Albanian economy. Shekulli, 16th

July 2010,

Read on: 29th

of July 2010.

Government Bonds, National Bank; Financial,

http://info.nbf.ca/fbn/cda/theme/0,,divId-2_langId-1_navCode-10090_navCodeExTh-

0,00.html

Accessed on: Accessed on: 3rd

of August 2010.

Government bond, http://en.wikipedia.org/wiki/Government_bond,

Accessed on: 2nd

of August 2010

Investments, T-bills/T-notes, Banka Kombetare Tregtare,

http://bkt.com.al/409.aspx,

Accessed on: 9th

of August 2010.

Jarvis, C., The rise and the fall of Albania’s pyramid scheme,

http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm

Accessed on: 4th

of August 2010.

Kaiku, E., Treasury Bonds, Hapesire, April 16 2007,pg 22. Accessed on: 4th

of August

2010.

Monetary Policy for the third quarter 2009, Bank of Albania, pg: 9; 10; 11; 18.,

http://www.bankofalbania.org/web/periodical_reports_of_monetary_policy_262_2.php,

Accessed on: 2nd

of August 2010.

21

Open market operations, Federal Reserve Bank of New York,

http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html

Accessed on: 4th

of August 2010.

Treasury Bond definition, http://www.investorwords.com/5061/Treasury_Bond.html,

Accessed on: 2nd

of August 2010.

Tushaj, A., Market concentration in the banking sector: Evidence from Albania, pg. 5; 10;

20; 25.,

http://www.uni-

bamberg.de/fileadmin/uni/fakultaeten/sowi_lehrstuehle/vwl_finanzwissenschaft/Forschung/

BERG/BERG_73_Tushaj.pdf, Accessed on: 1st

of August 2010.

22

Contents 1.Introduction .............................................................................................................................. 2

1.2 Historical background to public debt ............................................................................... 2

1.3 Development approach to current days............................................................................ 3

2. Operating with government security ...................................................................................... 4

2.1 Open Market Operation .................................................................................................... 4

2.2 Classification of bonds ...................................................................................................... 5

Treasury bonds ............................................................................................................................ 6

Treasury notes.............................................................................................................................. 6

CPI-indexed Treasury Notes (TIPS) ...................................................................................... 6

Treasury Bills .............................................................................................................................. 7

2.3 Practical demonstration..................................................................................................... 7

3. Albanian’s investments retrospective ................................................................................... 8

3.1 Bad investments ................................................................................................................ 9

3.2 How did the schemes operate? ....................................................................................... 10

4. Central Bank’s role ............................................................................................................... 12

4.1 Treasury bills as Albania’s monetary policy ................................................................. 12

4.1.1 Managing public debt .................................................................................................. 13

4.1.2 Liquidity and currency management............................................................................. 14

5. Government security as a mean of personal investment..................................................... 15

5.2 Competing conventional deposits .................................................................................. 16

6. Conclusion ............................................................................................................................. 17

Picture 1. Graphical Scheme of the Pyramid ........................................................................... 18

Abbreviations page .................................................................................................................... 19

List of reference ......................................................................................................................... 20

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