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Interest Treasury Bonds

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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. In general, when the Fed lowers interest rates on its own transactions, the credit markets follow.

That may not be true for "lower grade" corporate or municipal bonds, sometimes called "high yield" or "junk" bonds. The reason is this. Fed rates, as well as Treasury bond rates, are established on the assumption that there is absolutely no risk of non-payment. The rates simply reflect the time value of money at the particular moment. The interest rates on junk bonds tend to include a very significant risk premium, i.e., an elevated interest rate reflecting the possibility that the bond might not be paid or the issuer might go into bankruptcy. This risk premium is particularly high in troubled times -- during a recession or credit crunch. In those periods, the junk bond interest rates will be set by the market's perception of the likelihood of default, not the time value of money. The Fed tends to lower interest rates during recessions and credit crunches, in order to make more money available to borrowers. However, the yield on junk bonds might not follow the Fed's lead, because the very factors that caused the Fed to lower interest rates will cause the market to charge a higher risk premium on junk bonds.

Carlos Said:

What interest does the 30 years Treasury Bonds pays?

We Answered:

All this depends on the type of bond it is. An E bond is paying 1.30% and I bonds are paying 5.64%. They pay interest bi-annually. These rates can change however.

http://www.treasurydirect.gov/indiv/prod…

Mike Said:

I have several series EE Treasury Bonds, if I cash them in will I have to pay taxes on the interest?

We Answered:

Yes, you will have to pay income taxes on the interest. If you want to find out the value of your bonds and the maturity of them you can go to: www.savingsbonds.gov.
Personally I would rather invest in a Certificate of Deposit, Roth IRA, or someting else for the return on your investment. I recently purchased some gold and silver. You can purchase them at any reputable coin dealer. Over 15 years (average maturity for a bond) the return on those investments way out do a bond. There are also some conservative mutual funds on the market today that are fairly safe investments that give a better return/interest rate too. All of these items can be started with a minimal deposit of $50.00-500.00 depending on what you want.

Jon Said:

How, when treasury bonds climb interest rates go down?

We Answered:

Its simple mathematics.

Lets say a Treasury Bond is being traded at: $ 100,000

Lets also say that the interest you will collect
per year is $ 10,000

We both know that the interest rate is 10%

So after, lets say 18 months the bond climbs
to $ 101,500. You still get $ 10,000 per year in
interest.

What is the new interest rate?

10,000 divided by $ 101,500 = 9.85%

Hope this helps.

Erik Said:

A rise in interest rates on Treasury Bonds and the effect on the average price of a company's common stock

We Answered:

The short answer is it can be very bad.

Assuming you have a finance background, the value of company is determined by the value of its discount cash flow. The higher the interest way, the higher the discount rate one needs to use to value the cash flow of a company i.e. the lower is the NPV of the value of a company.

Put it another way, a rising interest rate environment can be very bad for companies because: a) consumers have less money to spend because they need to set aside more money for their mortgages/borrowings, b) it becomes more expensive for companies to expand if they need to borrow from the banks, c) if an investor can suddenly make 9% risk free by putting money with a bank, the company needs to be valued more attractively to make it a worthwhile investment e.g. the company may need to offer a higher dividend...

The bottom line is a 9% interest rate environment would distort the relative merits of various asset classes. Going from 5% to 9% implies a very sharp correction....

Clarence Said:

Is the US Government issuing too much treasury bills and bonds?

We Answered:

In the end, yes. Foreigners will only buy treasury bills and bonds, if the interest rate is attractive enough. The larger the debt, the more interest has to be offered to convince investors to buy.

Francis Said:

Suppose interest rates on Treasury bonds rose from 5 to 9 percent as a result of higher interest rates in Euro?

We Answered:

Capital will tend to move into Europe or in Treasury bonds to capture these lower risk and higher returns, thus demand for other securities will fall consequently leading to fall in it's average prices (it's sort of crowding-out effect).

P.S. You are asking many economics questions but in wrong categories (for instance math etc.) If you will ask here, then probability of receiving relevant answers is much higher, so "Economics" or "Business and finance" categories are best for such questions. Your Ad Here

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Treasury Bonds are sold in huge denominations. Usually sold to big monetary institutions. The government makes an interest payment each six months, and pays off principal at the maturity date -- which is frequently years away.

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