Updated from the Objectives Handout
You will be required to sign an honor statement as part of your exam.
Additional Office Hours on Thursday, October 16 from 3:30 to 4:30
I will again begin passing out the exams at 9:55 and 10:55 to ensure everyone has the full class time for the exam.
WSJ articles: All Credit Markets and discussion since the last exam 5678
I. Treasuries: Chapter 6 to Federal Agency Securities
1. Be able to explain how the auctions work (competitive and noncompetitive bids)
The auction for Treasury securities is conducted on a competitive bid basis. A noncompetitive bid is submitted by an entity that is willing to purchase the auctioned security at the yield that is determined by the auction process.
When a noncompetitive bid is submitted, the bidder only specifies the quantity sought(seek). The quantity in a noncompetitive bid may not exceed $1 million for Treasury bills and $5 million for Treasury coupon securities. A competitive bid specifies both the quantity sought and the yield at which the bidder is willing to purchase the auctioned security.
2. Compare and contrast T-bills, notes, and bonds
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3. Be able to read Treasury quotes
a. Be able to convert notes and bonds to dollars and cents
b. What are on-the-run and off-the-run and when issued Treasuries
The most recently auctioned issue is referred to as the on-the-run issue or the current issue. Securities that are replaced by the on-the-run issue are called off-the-run issues. At a given point
c. Be able to calculate the price, asked rate, and asked yield for T-bills
4. Be able to discuss STRIPS and TIPS
a. How are TIPS structured to help with inflation
In February 1985, the Treasury announced its Separate Trading of Registered Interest and Principal of Securities (STRIPS) program to facilitate the stripping倒卖 of designated Treasury securities. Today, all Treasury notes and bonds (fixed-principal and inflation indexed) are eligible for stripping. The zero-coupon Treasury securities created under the STRIPS program are direct obligations of the U.S. government.
For TIPS (Treasury Inflation Protection Securities), the inflation-adjusted principal is the principal that the Treasury Department will base both the dollar amount of the coupon payment and the maturity value on. It is adjusted semiannually. Part of the adjustment for inflation comes in the coupon payment since it is based on the inflation-adjusted principal. However, the U.S. government has decided to tax the adjustment each year. This feature reduces the attractiveness of TIPS as investments in accounts of tax-paying entities.
An inflation-adjusted principal must be calculated for a settlement date. The inflation-adjusted principal is defined in terms of an index ratio, which is the ratio of the reference CPI for the settlement date to the reference CPI for the issue date.
II. Term Structure of Interest Rates: All of Chapter 5
1. Discuss the spread between Treasuries and other bonds and how they have been changing over the past four years—what causes these changes
2. Be able to explain the difference between the expectations and market segmentation theories
The market segmentation theory also recognizes that investors have preferred habitats dictated by the nature of their liabilities. However, the market segmentation theory differs from the preferred habitat theory in that it assumes that neither investors nor borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from differences between expectations and forward rates.
There are several forms of the expectations theory: pure expectations theory, liquidity theory, and preferred habitat theory. Expectations theories share a hypothesis about the behavior of short-term forward rates and also assume that the forward rates in current