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At least from the US Treasury, why is there a yield AND interest rate when auctioning notes?

https://treasurydirect.gov/indiv/research/indepth/tnotes/res_tnote_rates.htm

I'm under the impression that when you buy a note from the Treasury, you are issued a "new" (i.e., full time until maturity) note which is valued at exactly what you pay, but you also get interest coupons which vary depending on when you buy them. I can understand how if you are buying an existing note from someone else that is already partially matured, you can negotiate the price you pay for it in order to offset the higher or lower interest coupons it comes with.

But in the case of a newly issued note, why would it not be sold for the exact value?

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But in the case of a newly issued note, why would it not be sold for the exact value?

When new notes are issued, the face / par value is decided; say $100. The Interest / Coupon rate. Say 4.5 percent.

As part of Auction processes; individuals or institutions can submit a bid. The highest bidder will get the note. In noncompetitive bid; one only quotes the quantity and has a guarantee to get all at the highest price. If there are more than one bidder with same highest price; it would be pro-rated.

This results in the note being purchased at premium or discount; hence the yield will be different. In essence it gives Treasury a mechanism to get best possible price via discovery. If they price the note to high; no one may buy. If priced to low; its a loss.

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  • thank you for the explanation and link; i cant believe i missed it on their website. could you please explain what pro-rated means in this context, if there are two highest prices?
    – tau
    Commented Jun 6, 2018 at 4:56
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    @tau If 10 bidders bid for same price say "X" for Quantity 25%. This can't be allocated. Say there are 20% noncompete bids; all these 20% will get request allocation for price "X". The other 10 bidders will get 80%; i.e. 8% each although they bid for 25% of notes for price "X"
    – Dheer
    Commented Jun 6, 2018 at 7:43
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I'm under the impression that ... you are issued a "new" ... note which is valued at exactly what you pay.

It depends on what you mean by "valued". The value is what you pay for it, but the face value, or the amount that you get when it matures, is constant. You are buying a $100 note (meaning a note that pays $100 at maturity) for less than $100 ($99.19 as of 6-5-2018). So the total yield includes both the interest that you receive plus the extra value get for buying the bond below the $100 "par" value.

If you look at the second quote, the yield is less than the interest rate, because you're buying the bond at a premium. So you pay $102.10 for a $100 note plus interest, so your total "profit" is less that the interest rate.

A 3.99% yield means "buying this note at the given price is equivalent to buying a note that pays 3.99% interest at its par value"

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  • Yes, but why are there even two values? Wouldn't it be simpler to just manipulate the interest rate rather than have a yield and interest rate?
    – tau
    Commented Jun 5, 2018 at 18:33
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    You mean change the interest rate on the bond? The interest rate is constant, but the market price constantly changes, so yield is necessary. Plus, the secondary market would still need yield as a measurement. As to why they're both quoted, to some people yield is important (to know how it compared to other bonds) to some people interest rate is important (to know how much you'll get each coupon, and to some price is important (to know how much they'll have to pay for the bond). You can calculate any one from the other two, but there's no two of the three will satisfy all investors.
    – D Stanley
    Commented Jun 5, 2018 at 19:05
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    @tau I'm not 100% sure how auctions work, but yes the rate for the bond is set at some point. It is certainly not negotiated in the secondary market.
    – D Stanley
    Commented Jun 5, 2018 at 19:23
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    @tau -- exactly; it's an auction, and the price is determined by what the bidders are willing to pay.
    – Pete Becker
    Commented Jun 5, 2018 at 20:18
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    @tau -- yes, us little guys only get to accept the price that the big guys determine.
    – Pete Becker
    Commented Jun 5, 2018 at 21:13

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