if I buy a 10 yr treasury
note, say 5.25% and then sell it in 1 yr
. Is my return same as buying 1 yr bond
Answer is NO
is directly tied to the perceived risk from the market. While it is accurate that for a government treasury note is most sensitive to interest rate, elimination of interest risk does not make bonds equal to each other.
Liquidity risk is something to consider (tying up your money for 10 years as opposed to having it free after 1 year). Transaction cost should also be considered (redeeming the 1 yr bill while you incur broker fees for selling the 10 yr note).
There are other risks, just can't name it off the top of my head. Basically, yields have to be higher to compensate for risk. In your dreamed scenario which interest rates don't change, the 10 yr note will still yield higher than the 1 year bill because investors want to be compensated for liquidity.
choice for less risk - aaa bond
- 10 yr
mat, bbb perpetual,bbb - 10 yr
mat, aaa - 5 yr
, BBB 5 yr
The best way to mitigate default risk is to buy a higher rated bond, so aaa is your best option (if you don't want to buy US Treasury Bills).
The best way to mitigate interest rate risk is to buy a shorter term bond, this way if the interest rates change greatly you'll be able to reinvest at the new rate sooner (this is also why interest rates *tend* to be lower for shorter term bonds, because you are assuming less risk due to the short term).
So, of them all, aaa - 5 yr has the least risk exposure.
Edit: By the way, a perpetual bond (or a perpetuity) is a security that makes an interest payment forever, without any principal payback, which give it the greatest interest rate exposure of the bunch.
why is time value concepts important in determining the value of a bond
Scenario- Buy a $1000 ten yr US treasury bond with a 5% interest rate.
You spend 1000 today, each year for ten years, you get 50, and and the end of 10 yrs you get 1000 back.
1st- There is value of time because you need an incentive not to spend 1000 today, compensation for postponing consumption. Also, you need compensation for other alternatives that you can undergo- auch as buying Google stock.
2nd- WIth inflation, the 1000 you get back in 10 years will not have the same purchasing power then as it does today. Remember how far 20 dollars went back in the day? how much can you buy with it tpday?
Myrtle Said:10 yr treasury Bond
Generally, increased strength in the bond market
makes interest rates go down.
Lisa Said:The fed adjusts short term interest rates. What affects long term rates such as a 30 year fixed mortgage?We Answered:Yes the mortgage rates follow the 10 year bond. So you can go to yahoo finance and click on the ten year bond and you will be able to compare that to interest rates. We watch it for our loans in float waiting to lock them for our clients.Joanne Said:present value of annuity problem on 30 year Treasury bond?We Answered:Should have just emailed me faye_d.
a) Coupon rate never changes. Pays 6% per year until maturity
b)Bond prices move inversely with...
Mathew Said:Buying and redeeming Securities directly from U.S. Department of the Treasury?We Answered:I haven't personally used it, but I have recommended it for a number of my customers. It is a completely safe website (provided you are at savingsbonds.gov).
The best investment really depends on you. If you want something that matures quickly (within 26 weeks) then you can get T-bills at $1000 a pop. Also for $1000 you can get T-Notes if you want something that will mature in 2, 5, or 10 years.
For most people wanting a secure investment, the regular bonds...
Glen Said:How and where do I buy TIPS (Treasury Inflation Protected Securities)?We Answered:Schwab
/Minnie Said:What are Treasury Inflation Protected Securities (TIPS)?We Answered:Treasury Inflation Protected Securities (TIPS) are a special type of treasury bond that protects your rate of return and principal from being whittled down by the effects of inflation. What happens is that when the consumer price index (CPI) reports an increase in inflation, the TIPS' principal and coupon payments would be raised by the same amount.
For example, a TIPS with a $1000 face value and a 5% coupon (annual coupon payment of $50) will see a respective increase...
Constance Said:the treasury inflation protection bonds pay ?We Answered:aRuth Said:Has anyone bought TIPS (treasury inflation protected bonds)and been satisfied with their performance?We Answered:the 2nd responder has made an excellent point. With TIPs, you pay taxes on money you do not receive. Sort of an IRS way of putting to you. But if you hold them in an IRA account, that is not a problem. I have some in mine.
There is a way around the tax problem with this type of investment if I understand the tax thing correctly. If you buy instead TIP,...
Courtney Said:Why might the Fed not be able to lower the interest rate on bonds that are “lower grade” than treasury bonds?We Answered:The Fed only sets rates for its own transactions with banks, e.g., the overnight rates at which it lends money to banks. However, those rates set the standard for many other rates in the economy. The rates on Treasury bonds, for example, move consistently with Fed rates, as do a number of other credit rates. Directly or indirectly (mostly indirectly), the Fed essentially controls interest rates on most financial instruments -- at least short-term instruments....
Alfredo Said:Should I hold my long-term Treasury Bond?We Answered:The usual purpose of holding a long term bond is to provide stability to your overall portfolio. If you have other, more volatile assets, like stocks (and, today, real estate), you might want to hold onto the bond so that you have something that doesn't make your stomach churn on a daily basis.
You seem to be looking at the bond in isolation, without considering other parts of your portfolio. From that perspective, for the remaining 9 years of the life of the bond, its value will fall, rise, fall, rise,...
Shirley Said:question about 1 year treasuries: how much will the spread generally be over fed rates?We Answered:Fed Funds Rates are usually at a slight spread over Treasury rates of comparable maturity (e.g., a few days to a month). Therefore, the spread between the one year and fed funds rates will be similar to the spread between the one month T-Bill rate and the one year treasury rate. Historically, these numbers are close. Since 1962, the FF rate has, on average, been less than a basis point higher than the one year. Currently, it is about three...
Brian Said:Is there an ETF that is positively correlated with 30-year treasury bond yield?We Answered:There are bond ETFs (like BLV). I know of no other ETFs that will react to long term bond yields.Jose Said:what is the bond that is directly correlated to the interest rates on a 30 year mortgage?We Answered:I aways thought the 30-year Treasury Bond (^TYX) was an indicator of investor sentiment of long term economic future, which also includes 30 year fixed rate mortgages.Viola Said:Is it possible to redeem a 10 year treasury bond after one year?We Answered:Sell not redeem.
No, the buyer cannot force the...
Marjorie Said:Explain this economic scenario about treasury bill interest rates & employment, please?We Answered:Bond prices, including Treasury bill interest rates, are all about expectations.
If economic times are good, people are going to want to borrow lots of money so they can make investments, etc. anticipating that they'll have money in the future to pay back any loans. This makes/lets interest rates go up (and bond prices go down)
If times are bad, fewer people want to borrow, so lenders have to entice borrowers by reducing the cost of borrowing, i.e. lowering interest rates.
There are other factors as well. In a...
Sherri Said:Probate question about providing a bond?We Answered:The bond the court wants you to file is a surety bond to provide assurance that you will faithfully perform your duties as personal representative.
I think you should use the services of an attorney to handle the decedent's estate.
If you choose not to hire an attorney, contact a full service insurance agency and secure a bond through an insurance company. You will have to pay a bond premium on an annual basis until the estate is closed.Stacey Said:US Treasury Bond Yields - Why do they change?We Answered:No -- it does not come with...
Cassandra Said:Can you explain the difference between an EE bond and an I bond?We Answered:EE bonds pay a fixed rate of interest for the life of the bond, I bonds pay a fixed rate and an inflation adjustment rates determined each quarter. all bonds if redeemed within 5 years lose 3 months of interest and under no circumstances can be redeemed until 1 year has passed.
EE bonds are at 1.2%, by buying them, you're locking money into an investment that doesn't even keep up with inflation. I bonds have a fixed rate and an inflation adjustment, and are currently...
Brett Said:where can I access historical 10 yr US Treasury bond data in tabular form for free on the internet?We Answered:This is the index for the 10 yr treasury. Select historical prices at the bottom of the page and download to a spreadsheet.
The index value is an alternative form of the yield. Yesterdays close was 50.36 which corresponds to a yield of 5.036%Glenda Said:Where Can I find the Bid/Ask historical data for 3 Months T-Bills?We Answered:Oddly enough, the Treasury Department's Bureau of Public Debt (www.publicdebt .treas.gov) lets you set up an account to buy bonds directly over the Web, but...
Edward Said:history- Alexander Hamilton, the first Secretary of the Treasury, developed a controversal plan to insure the?We Answered:President George Washington appointed Hamilton as the first Secretary of the Treasury. Hamilton served in the Treasury Department from September 11, 1789, until January 31, 1795.
Within one year, Hamilton submitted five reports that amounted to a financial revolution in the American Economy.
* First Report on the Public Credit: Communicated to the House of Representatives, January 14, 1790.
* Operations of the Act Laying Duties on Imports: Communicated to the House of Representatives, April 23, 1790.
Amber Said:If you buy a put option on a $100,000 Treasury bond futures contract with an exercise price of 95 and the pricWe Answered:depends when you sale either 4k lose or 21k gain!!!Audrey Said:How much interest rates would have to rise, for a Treasury Bond to drop 50% in price?We Answered:Interest rates would double.
1 / 50% = 2 (i.e., double)
Here's the proof. Suppose you want to make a 10% return on your money. You find a $1,000 par value bond with 5% coupon or $50.
In order for you to yield 10%, you offer $500 because $50 /...
Dolores Said:Treasury bond yields & oil prices are shooting up. Can we kiss 0bama's hope for recovery goodbye?We Answered:Treasury bond yields up, isn't that a good thing?
Oil prices up, yes Big Oil wants their profits FIRST before any recovery is allowed.Marshall Said:Why are the prices of TLT & TIP going in different directions if they are both treasury bond etf's?We Answered:They are both Treasury bonds but one is inflation protected the other is not. Therefore, they are subject to different set of factors that drive their volatility.
As you know, for a regular bond, coupon rate and the princial or face...
Nora Said:what are the investment risks with long-term treasury bond exchange traded funds?We Answered:John hit the nail on the head, but perhaps you would like more specifics. TLH currently pays 4.2% interest. There are mainly two risks that are associated with this particular fund. 1. the risk that long term interest rates might rise. 2. that inflation is going to increase. Note that the current interest rate is already below the inflation rate, about 2-4% before taxes and more after taxes. There are other risks including as John mentioned credit risk. Should U...
Andy Said:why are economists talking of a risk of treasury bond crash?We Answered:It is not economist that are buying treasuries , it is investors who are looking for a safe place to put money. When interests rates rise bonds having a low interest decline in value so that their effective return is the same as bond with the new higher rate. This means investors that do not hold bonds to maturity will lose money when they sell them.Rachel Said:What does it mean that the 10-YEAR TREASURY NOTE has a 4.33% Index Value?We Answered:Index value in 10-year treasury note is...
Shannon Said:US Treasury Yield Curve vs. business cycle?We Answered:The Yield Curve indicates what investors expect rates to be in the future. In relation to the business cycle, you could predict a recession/recovery by examining what the future spot rates will be in comparison to today's spot rate. For example, suppose a 5yr Treasury Bill produces a yield of 5% that's issued today. Also suppose there's 10yr Treasury Bill issued at 2% that is also issued today. According to Unbiased Expectations theory,, rates on a long-term instrument are equal to the geometric mean of the yield on a series of short-term...
Everett Said:What are U.S savings bonds and how are they useful?We Answered:Just about anything and everything you wanted to know about Savings Bonds is available at the treasury departments website
There are two different type of savings bonds; E/EE, I. The main difference between the two is how their interest rate is calculated. EE rates are fixed (adjusted twice a year - May/Nov), I has a composite rate made up of a fixed rate and a semiannual inflation rate (adjusted May/Nov).
Series EE Bonds purchased on or after May 1, 2005, earn a fixed rate of return (currently between 3-4%). Rates...
Joann Said:What is the difference between Treasury Bonds and TIPs?We Answered:TIPs (Treasury Inflation Protected Securities) are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater.
The return to maturity on Treasury bonds, on the other hand, is fixed.
For more details on TIPs, click on link, below.Virginia Said:What is Treasury Bonds?We Answered:Treasury bond
"Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from ten years to thirty years. They have coupon payment every six months...
Toni Said:How do treasury bonds work and are they a good investment?We Answered:They can be a good investment for safety and a hedge against the economy. Treasuries returned more than 20 percent in 2008. Its a good thing to have some in your portfolio.
http://www.treasurydirect.gov/indiv/prod…Geraldine Said:Why do the chinese want to dump their US treasury bonds?We Answered:I think you're mixing up your vocabulary. Treasury securities are all types of bonds, but you call them different names depending on the maturity of the bond. If the maturity is within one year, you call them T-Bills or Treasury Bills,...
Myrtle Said:How do I create a structured product for myself to track the S&P 500 Index?We Answered:What you are trying to do is a funded structure. A 5-year treasury zero coupon notes is available as a strip and it is not usually the cheapest. However, your nominal principal will be protected, but as you know there are many other risks to the zero-coupon issues. Zero coupon reduces reinvestment risks as you might know that there are many other risks that could affect the value of money.
Buying a 5-year call on the S&P500 with a strike price close to today's...
Alexander Said:What is the Ten year treasury bond and how does it effect mortgage rates?We Answered:A Treasury Bond is basically an IOU that the government of the United States issues when it wants to borrow money. For the Ten year T-Bill, maturity is ten years after issue, which is when the government will pay back the cash.
Basically, many mortgages with adjustable rates are linked to the 10 year T-Bill because of its length. T-Bills with shorter terms tend to be more variable and have lower interest rates (the ability to cash them in sooner eliminates the...