The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

U.S. TREASURY SECURITIES

U.S. Treasury securities are issued by the U.S. Department of the Treasury. These securities are backed by the full faith and credit of the U.S. government. Therefore, they are viewed as default-free securities. Interest income from Treasury securities is subject to federal income taxes but is exempt from state and local income taxes.

Types of Treasury Securities

There are two types of Treasury securities: discount and coupon securities. Treasury coupon securities come in two forms: fixed rate and variable rate securities. Treasury securities are all issued on an auction basis. The auctions are conducted on a competitive bid basis. All U.S. Treasury auctions are single-price auctions. In a single-price auction, all bidders are awarded securities at the highest yield of accepted competitive tenders. For Treasury coupon securities, the most recently auctioned issue is referred to as the on-the-run issue or the current issue. Securities that are replaced by the on-the-run issue are called off-the-run issues.

Treasury Bills

Treasuries are issued at a discount to par value, have no coupon rate, and mature at par value. As discount securities, Treasury bills do not pay coupon interest. Instead, Treasury bills are issued at a discount from their maturity value; the return to the investor is the difference between the maturity value and the purchase price. The current practice of the Treasury is to issue all securities with a maturity of one year or less ...