RSM430H1 Lecture Notes - Lecture 2: State-Owned Enterprise, Interest Rate Risk, United States Treasury Security
Document Summary
Investor selling bond has earned interest up until (but not including) settlement date. Actual price paid = clean price + accrued interest. In canada, use actual/actual days for government bonds, actual/365 for corporate bonds. Actual days means 365 or 366 days a year depending on actual day count. In us, use actual/actual for treasury, and 30/360 for agency, municipal, and corporate. Accrued interest is taxed even if interest not paid for party holding principal portion of security. Can be traded prior to the time the are issued by the treasury. Issued by federally related institutions, government sponsored entities. Risk of not knowing what risk of security is. Nominal yield curve defined by treasury bills or bonds issued by federal government. Each yield associated with specific term to maturity is risk-free rate. Short end of yield curve (money market, up to 2 years) starts with overnight rate/fed funds rate. Defined by monetary policy, controlled by central banks.
