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A Good Write Up On Treasury Securities

U.S. Treasury Securities
U.S. Treasury securities are direct debt obligations issued by the U.S. government. The government uses the revenue from the bonds to raise capital and/or make payments on outstanding debt. Since Treasury securities are backed by the full faith and credit of the U.S. government, they are generally considered to be free of credit risk and typically carry lower yields than other securities. The rates on Treasury securities have traditionally been used as the benchmark for interest rates throughout the U.S. economy and international capital markets.

Features and Benefits
  Credit Quality - Guaranteed by the full faith and credit of the U.S. government, Treasury securities are recognized as the safest investment available. All Treasury securities are rated Aaa and AAA by Moody's® and Standard & Poor's® respectively.
  State/Local Tax Exemption - Interest income from Treasuries is exempt from state and local income taxes. As a result, their stated interest rate may be less than that of fully taxable bonds, however, they may provide greater returns after taxes are taken into account. Generally the higher an investor's state and/or local tax bracket, the more beneficial they may be. Interest income from Treasuries is subject to federal income taxes. If you are subject to the federal alternative tax (NYSE:AMT), it is also includable in income for purposes of that tax. Capital gains and gains characterized as market discount recognized when bonds are sold or mature are generally taxable at both the state and federal level, although capital losses can usually be used to offset capital gains. Investors should consult a tax professional regarding their individual tax situation.
  Liquidity - The secondary market for U.S. Treasury securities is the most liquid secondary market in the world. The spread between bid and offer prices is usually considerably narrower than other securities, making most Treasury issues easy to purchase and sell. Any fixed income security sold prior to maturity may be subject to a substantial gain or loss.

  Lower yields - Because of the lack of default risk, Treasury securities typically offer lower rates than most other securities.
  Interest rate risk - Like all securities, Treasuries are susceptible to fluctuations in interest rates. If interest rates rise, bond prices will decline despite the lack of change in both coupon and maturity. The degree of price volatility tends to increase with the length of the maturity and decrease as the size of the coupon decreases.
  Call risk - Some Treasury securities carry call provisions that allow the bonds to be retired prior to stated maturity. Securities will typically be called when prevailing interest rates drop, making reinvestment less desirable for the buyer. Investors should understand the existence and specifics of call options associated with U.S. Treasury securities.
  Inflation Risk - The risk that the rate of the yield to call or maturity of the investment may not provide a positive return over the rate of inflation for the period of the investment.

Types of Treasuries
U.S. Treasury Bills
  Treasury bills (T-Bills) are auctioned weekly with three month (90 days) and six month (180 days) maturities. Bills with one year (360 days) maturities are auctioned every 28 days. The Treasury dictates the number of issues to auction under ceiling limits set by Congress.
  Interest payment calculations - Interest on T-Bills is calculated using an actual/360 formula. Interest is paid at maturity and accrues as if the year has 360 days and the month has 30 day.
  Call provisions - Because of their short term nature, T-Bills are not callable.
U.S. Treasury Notes and Bonds
  U.S. Treasury notes (T-Notes) and bonds (T-Bonds) are securities with coupons which pay interest semiannually and return principal at maturity. Typically the maturity for notes is between two and ten years, while the maturities for bonds are more than ten years.
  The Treasury is required to announce its intent to call four months before a potential call date.
Inflation-Indexed Securities
The principal of Treasury inflation-indexed securities is adjusted daily for inflation. However, the inflation adjustment will not be payable by the Treasury until maturity, when the securities will be redeemed at the greater of their inflation-adjusted principal amount or the principal amount of the securities on the date of original issuance.
The index for measuring the inflation rate will be the non-seasonally adjusted Consumer Price Index-U. CPI-U was selected by the Treasury because it is the best known and most widely accepted measure of inflation.
  Interest Payments - Every six months, the Treasury will pay interest based on a fixed rate of interest determined at auction. Semi-annual interest payments are determined by multiplying the inflation-adjusted principal amount by one-half the stated rate of interest on each interest payment date.
  Payment at Maturity - If at maturity, the inflation-adjusted principal is less than the par amount of the security (due to deflation), the final payment of principal of the security by Treasury will not be less than the par amount of the security at issuance. In such a circumstance, Treasury will pay an additional amount plus the inflation-adjusted principal amount, which will equal the par amount of the securities on the date of original issuance.
  Maturity Initially, the securities will be issued with a 10-year maturity; however, Treasury expects to issue other maturities over time.
  Stripping - The securities will be eligible for the STRIPS (Separate Trading of Registered Interest and Principal of Securities) program as of the first issue date. Unlike the conventional STRIPS program, however, interest components stripped from different inflation-indexed securities, at least initially, will not be interchangeable or fungible with interest components from other securities, even if they have the same payment or maturity date.
U.S. Treasury Zero Coupon Bonds
While Treasury securities are never issued as zero coupon bonds, the remaining interest payments on all securities can be "stripped" from the principal to make up multiple zero coupon bonds with six month maturities. These bonds can then be traded as independent negotiable zero coupon securities.
There are a number of types of Treasury strips
  Some have been stripped by the Treasury itself, others have been stripped by private dealers.
  There are a number of series within each type.
  Some stripped Treasuries are more liquid than others.
  Treasury zeros are traded on a yield basis. The yield and settlement date are used to calculate the price of the security. Therefore, a change in the settlement date will effect the price. Zero coupon security prices are particularly susceptible to the market fluctuations that effect all securities.
Treasury Auctions
Treasury securities are auctioned in four forms:
  short-term bills
  intermediate-term notes
  long-term bonds
  inflation-indexed securities or Treasury Inflation-Protected Securities (TIPs)
A Single-Price Auction, also known as the Dutch Auction process, allows each successful competitive bidder and each noncompetitive bidder to be awarded securities at the price equivalent to the highest accepted rate or yield. This type of auction is now used for all T-Bills, Notes, and Bonds. In the past it applied only to the 2-year and 5-year note auctions. The Federal government holds the auctions for these securities.
When the size of a pending auction is announced, retail customers have an opportunity to participate by submitting non-competitive tenders or bids. These orders are $5 million or less in size for Treasury bills, Treasury notes and coupon bonds. The remaining participants in the auction are institutional dealers who submit competitive bids to the Treasury. Institutional dealer prices will vary according to the competitive level of their bid. After all competitive bids are submitted by dealers, retail customers will receive an average price from the auction as determined from all the accepted competitive bids.