Bond (finance) / Treasury Bonds

asr: for 1 month T-bills , people are in Q lines to give money for 0% interest.
"The world's been divided into two classes, Treasurys and risky assets," said Russ Koesterich, head of investment strategies at Barclays Global Investors. "Risky assets are anything that's not Treasurys."
The rally in Treasurys has resulted in some jaw-dropping low yields.
Earlier this week, the U.S. government sold $32 billion in four-week Treasury bills at a yield of 0%, meaning that investors were willing to lend the government money for nothing except the assurance their principal wouldn't decline.
"If you want to buy Treasurys, you have to get in line with everyone else," said Karen Wiggen, who manages Charles Schwab & Co.'s $34 billion U.S. Treasury Money Fund
Even though they accepted zero yields, many investors only got a portion of the securities they had hoped to buy at Tuesday's auction. Demand outpaced bills on offer by four-to-one, said the Treasury Dept.
"Anything labeled the full-faith and credit of the U.S. government creates a comfort level for quite a few people," she said. See earlier story on zero yields.
The U.S. Treasury will sell $16 billion in 10-year notes on Thursday. In the secondary market, that means securities' yields (UST10Y:
this month breached their lowest levels since at least 1955. They recently traded at 2.69%.



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For example, say you buy a bond with a face value of $1,000, a coupon of 8%, and a maturity of 10 years. This means you'll receive a total of $80 ($1,000*8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you'll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you'll get your $1,000 back.

Measuring Return With Yield
Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.

Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).

Yield To Maturity
Of course, these matters are always more complicated in real life. When bond investors refer to yield, they are usually referring to yield to maturity (YTM). YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond to maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).

Knowing how to calculate YTM isn't important right now. In fact, the calculation is rather sophisticated and beyond the scope of this tutorial. The key point here is that YTM is more accurate and enables you to compare bonds with different maturities and coupons.

Putting It All Together: The Link Between Price And Yield
The relationship of yield to price can be summarized as follows: when price goes up, yield goes down and vice versa. Technically, you'd say the bond's price and its yield are inversely related.

Here's a commonly asked question: How can high yields and high prices both be good when they can't happen at the same time? The answer depends on your point of view. If you are a bond buyer, you want high yields. A buyer wants to pay $800 for the $1,000 bond, which gives the bond a high yield of 12.5%. On the other hand, if you already own a bond, you've locked in your interest rate, so you hope the price of the bond goes up. This way you can cash out by selling your bond in the future.



Price In The Market
So far we've discussed the factors of face value, coupon, maturity, issuers and yield. All of these characteristics of a bond play a role in its price. However, the factor that influences a bond more than any other is the level of prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of the older bonds and bringing them into line with newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older bonds and bringing them into line with newer bonds being issued with lower coupons.