1. Fall-02 http://pluto.mscc.huji.ac.il/~mswiener/zvi.html EMBAF Zvi Wiener Based on Chapter 6 in Fabozzi Bond Markets, Analysis and Strategies Treasury and Agency Securities

2. Zvi WienerFabozzi Ch 6 slide 2 Treasury Securities Issued by the US department of the Treasury and are backed by US government. 1997 the market was $3.4T with 260 issues For comparison: 1997 corporate bonds $1.4T with 10,000 issues, 1997 municipals $1.8T with 70,000 issuers.

3. Zvi WienerFabozzi Ch 6 slide 3 Types of Treasuries Treasury Bills – discounted, with initial maturities of 91, 182 and 364 days. T-Notes – one to ten years T-Bonds – more than 10 years to maturity Recently many changes – no more 20 and 3 year issues, etc.

4. Zvi WienerFabozzi Ch 6 slide 4 TIPS Inflation protected securities, similar to Israeli CPI linked bonds. Taxation problems.

5. Zvi WienerFabozzi Ch 6 slide 5 Auction Primary market – primary dealers Secondary market When-issued market, TBA etc.

6. Zvi WienerFabozzi Ch 6 slide 6 Price quotes for T-Bills Y d = annualized yield D = dollar discount F = face value t = number of days to maturity

7. Zvi WienerFabozzi Ch 6 slide 7 Price quotes for T-Bills A T-Bill with 100 days to maturity And face value of $100,000 is traded for $97,569 will be quoted at 8.75% on a bank discount basis

8. Zvi WienerFabozzi Ch 6 slide 8 Bond Equivalent Yield

9. Zvi WienerFabozzi Ch 6 slide 9 Price quotation of bonds In units of 1/32, for example 92-14 means that the price is 92+14/32% of par (plus accrued interest) + means 1/64

10. Zvi WienerFabozzi Ch 6 slide 10 Accrued Interest Additional payment for part of the coupon time $

11. Zvi WienerFabozzi Ch 6 slide 11 Price Quotes and Accrued Interest Assume that the par value of a bond is $1,000. Price quote is in % of par + accrued interest the accrued interest must compensate the seller for the next coupon.

12. Zvi WienerFabozzi Ch 6 slide 12 Trade date Settlement date Safekeeping

13. Zvi WienerFabozzi Ch 6 slide 13 STRIPS Separate Trading of Registered Interest and Principal of Securities. Reconstitution of a bond.

14. Zvi WienerFabozzi Ch 6 slide 14 Government Sponsored Enterprises Federal Home Loan Bank System Federal National Mortgage Association Federal Home Loan Mortgage Corporation Federal Farm Credit Bank System

15. Zvi WienerFabozzi Ch 6 slide 15 Government-Sponsored Enterprises Fannie Mae “benchmark” and Freddie Mac “reference” notes and bond. Can be electronically transferred through clearing houses as Euroclear and Cedel and NBES. Outstanding amount $150B with 2-30 years to maturity.

16. Zvi WienerFabozzi Ch 6 slide 16 Government-Sponsored Enterprises GNMA - Government National Mortgage Association FHLBS - Federal Home Loan Bank System Sallie Mar - Student Loan Marketing Association

17. Zvi WienerFabozzi Ch 6 slide 17 Repurchase Agreements Borrowing and lending using Treasuries and other debt as collateral. Repo (loan). You sell a security to counterparty and agree to repurchase the same security at a specified price at a later date (often next day). Reverse Repo - you agree to purchase a security and sell it back at a specified price later.

18. Zvi WienerFabozzi Ch 6 slide 18 Repurchase Agreements Most repos are general-collateral repo rate. Some securities are special (for example on- the-run). Specialness peaks around next auction, then declines sharply. NY FED operates a securities lending for primary dealers using FED’s portfolio while posting other Treasury security as collateral.

19. Zvi WienerFabozzi Ch 6 slide 19 Treasury Based Derivatives Futures and options for 2, 5, 10 year notes and bonds are listed by CBOT and CFFE. CNE offers futures and options on bills and other short term interest rate products. End of October 99 open interest for CBOT long-bond futures was 635,000 (each one based on $100,000 face value). Daily volume 300,000 contracts.

20. Zvi WienerFabozzi Ch 6 slide 20 Treasury Based Derivatives CBOT also offers options on Treasury futures - contract that allows the holder to buy/sell a future contract at a specified price. Cheapest-to-deliver option and conversion factor (compare to commodities).

21. Zvi WienerFabozzi Ch 6 slide 21 TIIS = TIPS Treasury Inflation Indexed (Protected) Securities. Since 97, $92B were issued, based on the non- seasonally adjusted CPI lagged 2.5 months. The quoted price do not reflect the accumulated inflation compensation. Real price = quoted*index ratio + accrued interest I-bonds saving bonds that are also CPI indexed.

22. Zvi WienerFabozzi Ch 6 slide 22 TIIS = TIPS 5, 10, 30 years notes and bonds. Less liquid: 2-6 cents per $100 face. CBOT offers options and futures on TIPS Canada, France, England, Israel have similar types of debt.

23. Zvi WienerFabozzi Ch 6 slide 23 T-bills markets Issuance of T-bills was cut sharply. Between Dec-96 and Sep-99 the total outstanding amount of coupon securities declined 7% while bills declined 16%. Treasury Debt buybacks. Reverse auctions trying to remove small issues.

24. Zvi WienerFabozzi Ch 6 slide 24 Questions 1, 5, 7 Home Assignment Chapter 6

25. Zvi WienerFabozzi Ch 6 slide 25 UST example 8.75 UST 11/08 Security was purchased 06-Jun-01 @ 110-31 Security was sold 06-Sep-01 @ 109-27+ Calculate the loss (10,000 units) …

26. Zvi WienerFabozzi Ch 6 slide 26 UST example Bought 11,096,875.00 Accrued 23 days 54,687.50 11,151,562.50 Sold 10,984,375.00 Accrued 115 days 273,437.50 11,257,812.50 Profit of $106,350.00