Treasury Securities
Chapters in this video
- 0:00 The risk-free rate benchmark and full faith and credit
- 1:37 State and local tax exemption versus federal taxation
- 2:27 Competitive versus non-competitive auction bids
- 3:43 T-Bills, T-Notes, T-Bonds: maturities and coupon structures
- 4:59 TIPS principal adjustment with fixed coupon rate
- 6:15 How STRIPS are created from coupon and principal stripping
- 7:27 Phantom income: the tax ghost of zero-coupon STRIPS
- 8:38 Reinvestment risk eliminated, interest rate risk maximized
- 9:09 Rapid-fire exam recap
What this video covers
- The full faith and credit backing of Treasuries and why they serve as the risk-free rate benchmark for all other bonds
- The tax treatment of Treasury interest: exempt from state and local taxes, fully taxable federally, and how this flips from municipal bonds
- Treasury auction mechanics and the guarantee that non-competitive bidders receive securities while competitive bidders may be shut out
- The maturity, coupon, and issuance distinctions among T-Bills (discount, zero coupon, max 1 year), T-Notes (2-10 years, semiannual coupon, par), and T-Bonds (20-30 years, semiannual coupon, highest interest rate risk)
- How Treasury Inflation-Protected Securities (TIPS) work: fixed coupon rate, principal that adjusts with Consumer Price Index (CPI), and the deflation floor at original par value
- What Separate Trading of Registered Interest and Principal of Securities (STRIPS) are, how broker-dealers create them by stripping coupons and principal, and why pension funds use them for liability matching
- Phantom income on STRIPS versus the absence of phantom income on T-Bills, and why zero-coupon STRIPS eliminate reinvestment risk but carry the highest interest rate risk at a given maturity
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