US Treasury Securities and T-bills Nguyen Hung Tien, Yonsei GSIS

Contents Part 1 - Overview of U.S Treasury Securities Part 2 - Treasury Bills (T-bills) Conclusion

Part 1 – Overview of U.S Treasury Securities

Overview U.S. Treasury securities-such as bills, notes and bonds, Treasury-Inflation Protected Securities (TIPS) -are debt obligations of the U.S. government. U.S. Treasury securities are considered the safest of all investments. They are viewed in the market as having no “credit risk” meaning that it is virtually certain your interest and principal will be paid on time.

Overview Because of this unique degree of safety, interest rates are generally lower than for other widely traded debt, such as corporate bonds. The amount of marketable U.S. Treasury securities is huge, with $4.5 trillion in outstanding bills, notes and bonds as of 1 st quarter of 2008.

Overview The average daily trading volume in U.S. Treasuries was nearly $ 600 billion in 2007 and these securities trade virtually 24 hours a day in Tokyo, London, and New York markets. In 2007, the U.S. Federal Reserve estimated that 7% of bills, notes and bonds were held by individuals, 9% by banks and mutual funds, 7% by public and private pension funds, 47% by foreign investors, 5% by state and local governments and 15% by other investors.

Top Foreign holders of U.S. Treasuries HolderTotal ($ bil.) China739.6 Japan634.8 United Kingdom Caribbean176.6 OPEC186.6

Advantages of U.S Treasury Securities The primary advantage of Treasury securities is safety; They are available with a wide range of maturity dates; Their interest payments are exempt from state and local income taxes; Its high level of liquidity, which means that Treasuries are easy to buy and sell.

Part 2: Treasury Bills – (T-bills)

What is T-bills -A short-term debt obligation backed by the U.S. government with a maturity of less than one year.

Characteristics of T-Bills -Like zero-coupon bond, they do not pay interest prior to maturity. -They are sold at a discount of the par value to create a positive yield to maturity. -Many regard Treasury bills as the least risky investment available to U.S. investors. -They are traded in secondary market by investors.

T-Bills Maturities T-Bills have different types of maturity: 4 weeks, 13 weeks, 26 weeks, or 52 weeks. T-Bills can be redeemed before maturity, but the amount you receive is subject to market demand for those securities and is not guaranteed by the Treasury.

T-Bills Prices T-Bill is sold for less than its face value at maturity. This difference between the purchase price and the amount received at maturity equals the investor’s interest on the bond. Example: a 26-week T-Bill with a $1,000 face value might be sold initially for $990. When it matures, the investor will receive the full $1,000. The extra $10 the investor receives is their investment return for purchasing the T-Bill.

Market Risk and T-bills Although T-Bills are considered free from credit risk, they are affected by other types of risk: - Interest-rate risk and - Inflation risk

How to value the yield of T-bills

Conclusion - For investors looking for safety, predictability, and easy liquidity, T-bills offer a range of benefits suited to those objectives. - They also offer tax advantages, and, because of the market’s size, security and demand by other investors, T-bills represent the most liquid capital investment in the world.

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