Notes

B- Short term securities and government securities

Short term securities (i.e. securities with maturity less than one year) are sold at a discount (i.e. nominal value less the interest to be earned over the remaining number of days to maturity), see Section 2F-1b of preceding chapter. There is no coupon, and no additional benefits such as conversion right, but there may be a penalty for early redemption in the case of some bank certificates of deposit.

For a long list of short term securities issued by the US Treasury, such as treasury bills and certificates, or by banks insured by FDIC (Federal Deposit Insurance Corporation) or FSLIC (Federal Savings and Loan Insurance Corporation), such as certificates of deposit in less than $100,000 nominal value, the dollar value is practically never calculated. Decisions are entirely based on the promised rate, or quoted yield, which does not vary from the date of issue to maturity which, by definition, takes place within one year (or only occasionally a little longer). Price paid at purchase and amounts received at redemption are calculated by commercial banks or federal reserve banks using the promised rate very precisely, right down to the last penny.

The reason why the nominal rate at issue is the only statistic used is that government securities are fully backed by the US government and are virtually void of risk, and non-government money market instruments are fully insured, and because the issues are too quickly redeemed for any secondary market to exist. There isn't a great deal of analysis that could be done on these securities because of lack of risk. Naturally, rates at which these securities are issued vary from week to week. The analysis must, therefore, be directed at the elements affecting interest rates in general, which were discussed in Chapter 2 Section D, and will be further analyzed again in Chapter 15 Section C-6.

See review questions Q-3B.1 through Q-3B.6.

Previous: Bonds
Last modified: Jun/01/01 Next: Loans