Fall-02 mswiener/zvi.html EMBAF Zvi Wiener Based on Chapter 6 in Fabozzi Bond Markets, Analysis and...
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Transcript of Fall-02 mswiener/zvi.html EMBAF Zvi Wiener Based on Chapter 6 in Fabozzi Bond Markets, Analysis and...
Fall-02http://pluto.mscc.huji.ac.il/
~mswiener/zvi.htmlEMBAF
Zvi WienerBased on Chapter 6 in Fabozzi
Bond Markets, Analysis and Strategies
Treasury and Agency Securities
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi Ch 6 slide 4
TIPS
Inflation protected securities, similar to Israeli CPI linked bonds.
Taxation problems.
Zvi Wiener Fabozzi Ch 6 slide 5
Auction
Primary market – primary dealers
Secondary market
When-issued market, TBA etc.
Zvi Wiener Fabozzi Ch 6 slide 6
Price quotes for T-Bills
tF
DYd
360
Yd = annualized yield
D = dollar discountF = face valuet = number of days to maturity
Zvi Wiener Fabozzi Ch 6 slide 7
Price quotes for T-Bills
%75.8100
360
000,100
569,97000,100
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
Zvi Wiener Fabozzi Ch 6 slide 8
Bond Equivalent Yield
d
d
Yt
YyieldequivCD
360
360.
Zvi Wiener Fabozzi 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
Zvi Wiener Fabozzi Ch 6 slide 10
Accrued Interest
Additional payment for part of the coupon
periodcouponinDays
periodAIindayscouponAnnualAI
2
time
$
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi Ch 6 slide 12
Trade date
Settlement date
Safekeeping
Zvi Wiener Fabozzi Ch 6 slide 13
STRIPS
Separate Trading of Registered Interest and
Principal of Securities.
Reconstitution of a bond.
Zvi Wiener Fabozzi 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
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi Ch 6 slide 16
Government-Sponsored Enterprises
GNMA - Government National Mortgage Association
FHLBS - Federal Home Loan Bank System
Sallie Mar - Student Loan Marketing Association
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi 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).
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi 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.
Zvi Wiener Fabozzi Ch 6 slide 24
Questions 1, 5, 7
Home AssignmentChapter 6
Zvi Wiener Fabozzi 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) …
Zvi Wiener Fabozzi 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