6

Can someone explain to me how these bonds work?

Are they released to the public at a certain price (face value) and interest rate, and the face value is what traded on in the market place, resulting in a change in the yield?

Does the yield determine how much you will receive at each payment for 10 years assuming you hold onto the bond?

The latest quote is 2.53, does that mean I'd receive that percent of face value each payment period, for 10 years?

6

Here is a page on the US treasury notes

Regarding how to purchase:

You can bid for a note in either of two ways:

  • With a noncompetitive bid, you agree to accept the yield determined at auction. With this bid, you are guaranteed to receive the note you want, and in the full amount you want.
  • With a competitive bid, you specify the yield you are willing to accept. Your bid may be: 1) accepted in the full amount you want if your bid is less than the yield determined at auction, 2) accepted in less than the full amount you want if your bid is equal to the high yield, or 3) rejected if the yield you specify is higher than the yield set at auction.

To place a noncompetitive bid, you may use TreasuryDirect, a bank, or a broker.

To place a competitive bid, you must use a bank or broker.

Once you buy the note the price you can sell it for will move depending on what interest rates are doing during those 10 years.

The price and interest rate of a Note are determined at auction. The price may be greater than, less than, or equal to the Note's par amount. (See prices and interest rates in recent auctions.)

The price of a fixed rate security depends on its yield to maturity and the interest rate. If the yield to maturity (YTM) is greater than the interest rate, the price will be less than par value; if the YTM is equal to the interest rate, the price will be equal to par; if the YTM is less than the interest rate, the price will be greater than par.

  • The last 10 year has an interest rate of 1.75%, how do you end up getting the 2.53% that is quoted on CNBC and in other outlets. What exactly is going on in that scenario? It says that treasury notes pay out semi-annually, so does that mean I will receive 2.53% on the face value of the bond twice per year? Or is that yield just representative of the price I am paying for the bond? For instance, if I buy the bond at a discount, the yield is showing me the amount I am getting when you include the discount. I'm new to bonds and confused on how they work. – Jon Jul 12 '13 at 12:24
  • 1
    For example, let's say someone bought $100,000 worth of a 10 year treasury bond at this very moment with a yield of 2.56%, does this mean you will receive the interest rate of 1.75% twice per year. So every 6 months you will receive $1750 for 10 years. Are you locked in at that rate for 10 years? – Jon Jul 12 '13 at 12:52
  • 1
    you will receive a payment worth 1/2 of the annual interest every 6 months. At the end of the10 period you get the face value back. The rate is locked in for the 10 years, unless you want to sell them early. – mhoran_psprep Jul 12 '13 at 13:04
  • 1
    Ok, so let's say you invest $100,000 in a 10 year bond and the interest rate is 1.75%. That means I will get $1750 per year for 10 years, correct? So at maturity I will receive my 100k, and I'll have collected $17,500 in interest over 10 years. Assuming I keep my bond for the entire 10 years, it doesn't matter what happens to the yield, is that correct? – Jon Jul 12 '13 at 13:24
  • 3
    @Jon that is correct. If you don't intend to sell it - the sale price is none of your concern. – littleadv Jul 12 '13 at 16:58
-2

@jon your 1st assumption was correct. If you invest in a 10yr treasury bond of face value of 100,000$ . You will recieve interest twice at 1/2 the coupon rate . So over the period of 10 years @ 2.56 it would earn you 1.78%x100000=178000+178000(6months payout @ 1.78%) or 2.56%x100000=256000(total annual payout)

Source:http://www.thesimpledollar.com/making-sense-of-treasury-securities-treasury-bills-notes-and-bonds/

  • 2
    check your math. You have a decimal point problem. – mhoran_psprep Sep 3 '14 at 10:02
  • 3
    Not only is the calculation overstating by a factor of 100, but half of 2.56 is not 1.78. – Chris W. Rea Sep 3 '14 at 12:01

protected by Chris W. Rea Jun 13 '17 at 7:18

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.