【正文】 original maturities of three months (13 weeks), six months (26 weeks), and one year (52 weeks). ? Irregularseries bills are issued only when the Treasury has a special cash need. These instruments include strip bills and cash management bills. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 48 How Bills Are Sold Source: . Bureau of the Public Debt How Bills Are Sold 11 49 ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 50 Calculating the Yield on Bills ? Tbills do not carry a promised interest rate. Instead, they are sold at a discount from their par or face value. ? Bill yields are determined by the bank discount method, which does not pound interest rates and uses a 360day year for simplicity. ? The bank discount rate (DR) on Tbills = Par value – Purchase price ? 360 . Par value Days to maturity ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 51 Calculating the Yield on Bills ? Because the rates of return on most other debt instruments are not figured in the same way, parisons with other securities cannot be made directly. ? The investment yield or rate (IR) on Tbills = Par value – Purchase price ? 365 . Purchase price Days to maturity ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 52 Market Interest Rates on Treasury Bills 24681012141961 1966 1971 1976 1981 1986 1991 1996 20203Month 12Month Data Source: Board of Governors of the Federal Reserve System % ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 53 Investors in Treasury Bills ? Tbills are held mainly by mercial banks, nonfinancial corporations, state and local governments, and the Federal Reserve banks. ? Commercial banks and private corporations hold Tbills as a reserve of liquidity. ? The Federal Reserve banks conduct part of their open market operations in Tbills because of the depth and volume of activity of the market. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 54 Primary Dealers ? Primary dealers are dealer firms that are qualified to trade securities directly with the Federal Reserve Bank of New York. ?Primary dealers agree to “meaningfully participate” in trading with the Federal Reserve at any time the Fed wishes, to make “realistic” bids, and to trade continuously in the full range of government securities. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 55 Primary Dealers ? Primary dealers have a significant incentive to attempt to corner the government securities market and to collude and place mon bids, so that all the dealers can get some share of the new securities to fill their customers’ orders and make a profit. ? In the wake of a scandal involving Salomon Brothers in 1991, auction rules were tightened and a marketsurveillance mittee was created. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 56 Primary Dealers ? Then in 1998, the . Treasury abandoned its firstprice sealedbid, or English auction approach, in which each successful bidder paid the price that it had bid. ? It adopted the uniformprice, or Dutch auction method, in which all successful bidders receive securities at the same price – the marketclearing or stopout price. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 57 Dealers in the Money Market ?The bulk of the dealers’ operating capital is obtained through borrowings from mercial banks and other institutions. ? The two most heavily used sources of dealer funds are demand loans from the largest banks and repurchase agreements with banks and other lenders. ? A demand loan may be called in at any time if the banks need cash urgently. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 58 Dealers in the Money Market ? Under a repurchase agreement (RP), the dealer sells securities to a lender but makes a mitment to buy back the securities at a later date at a fixed price plus interest. ? RPs are simply a temporary extension of credit collateralized by marketable securities. ? Term RPs are for a set length of time (overnight, a few days, 1 month, 3 months, …) while continuing contracts may be terminated by either party on short notice. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 59 Dealers in the Money Market ? Interest ine from RPs = Amount ? Current ? Number of days loaned . of loan RP rate 360 days ? Periodically, RPs are marked to market. If the price of the pledged securities has dropped, the borrower may have to pledge additional collateral. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 60 Sources of Dealer Ine ? Dealers hope to earn a profit (the positive spread between the bid and ask prices) from their marketmaking activities. ? By correctly anticipating interest rate movements, dealers may earn sizable position profits too. ? If interest rates fall (and security prices rise), dealers will experience capital gains on a long position (but losses on a short position). ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 11 61 Sources of Dealer Ine ? Dealers also receive carry ine, the difference between interest earned on the securities they hold and their cost of borrowing funds. ? In addition, dealers receive miscellaneous serv