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Math in the News: 8/22/11


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In this issue of Math in the News we look at Treasury Bonds, Notes, and other securities, since these are primary means that the U.S. govt. uses to raise cash.

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Math in the News: 8/22/11

  1. 1. 8/22/11<br />
  2. 2. Treasury Bonds<br />To generate cash the U.S. Treasury Dept. prints and sells Treasury Bills, Bonds, and other similar types of notes.<br />
  3. 3. Treasury Bonds<br />Purchasing a Treasury Note means that you are lending money to the U.S. government. In exchange, the government will pay you back the money with interest.<br />
  4. 4. Treasury Bonds<br />This is how a Treasury Note works. <br />The government will issue a note with a face value of $1000.<br />Your cost for the note is less than $1000, e.g., $990.<br />When the note matures, the government pays you $1000.<br />The interest you earn is the difference between the $1000 and the price you paid.<br />Face value: $1000<br />Your cost:<br /><$1000<br />
  5. 5. Treasury Bonds<br />The amount of time needed to earn back the money paid and interest is known as the Maturity.<br />Treasury Bills can have Maturities of 3 months or 6 months.<br />To calculate the interest earned, use this formula.<br />FV = Face Value of the Note<br />PP = Purchase Price of the Note<br />M = Maturity<br />
  6. 6. Treasury Bonds<br />The Treasury Dept. auctions Treasury securities several times throughout the year. These include:<br />T Bills<br />Treasury Notes<br />Treasury Bonds<br />TIPS<br />This table shows the results of a recent Treasury auction.<br />Let’s look at a 13- week T Bill.<br />
  7. 7. Treasury Bonds<br />Using the interest formula, we find that the interest on the T Bill is 0.035%.<br />This is not a very high percent. Why is it so low?<br />FV = $1000<br />PP = $999.91<br />M = Maturity<br />
  8. 8. Treasury Bonds<br />In fact, the yield on all Treasury securities varies. This chart shows the change in 3-month T Bills from 2007 to 2011.<br />Note how the interest rates have significantly decreased.<br />This reflects the slowdown in the U.S. economy over the past few years.<br />
  9. 9. Treasury Bonds<br />Treasury securities are still a good investment for a number of reasons:<br />Backed by the U.S. government<br />A guaranteed return on investment<br />