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Series 7
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Textbook
Introduction
1. Common stock
2. Preferred stock
3. Bond fundamentals
4. Corporate debt
5. Municipal debt
6. US government debt
6.1 Review
6.2 Treasury products
6.2.1 Bills, Notes, Bonds, & CMBs
6.2.2 STRIPS & Receipts
6.2.3 TIPS
6.3 Federal agency products
6.4 The market & quotes
6.5 Suitability
7. Investment companies
8. Alternative pooled investments
9. Options
10. Taxes
11. The primary market
12. The secondary market
13. Brokerage accounts
14. Retirement & education plans
15. Rules & ethics
16. Suitability
Wrapping up
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6.2.1 Bills, Notes, Bonds, & CMBs
Achievable Series 7
6. US government debt
6.2. Treasury products

Bills, Notes, Bonds, & CMBs

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The US Department of the Treasury manages the finances of the US Government. The Treasury collects taxes through the IRS and issues securities to fund federal projects and other government spending.

More precisely: the US Mint produces coins, the Treasury’s Bureau of Engraving and Printing produces paper bills, and the Federal Reserve issues digital currency and distributes currency (coins, bills, and digital).

The US Treasury issues several types of securities to finance the federal government. These securities vary by maturity (short-term vs. long-term) and by features such as how interest is paid. One consistent feature across Treasury securities is their minimum denomination. While many bonds have a minimum investment of $1,000, Treasuries have a minimum denomination of $100.

Treasury bills are short-term, zero coupon debt securities issued by the Treasury. They’re the most commonly sold Treasury security because they can be auctioned as often as weekly (many other Treasury products are auctioned monthly or quarterly).

Sidenote
Frequency of Treasury auctions

With over $33 trillion of outstanding debt, the US Treasury must raise large amounts of money to cover current government spending and repay existing creditors. How often the government sells debt depends on factors such as the current budget deficit and the government’s cash flow (primarily from taxes).

If you’d like to see an example, here’s a tentative schedule for Treasury auctions. Different products are sold at different times and frequencies. Auction timing can change, but the Series 7 exam focuses on the general patterns below.

Here’s what you’ll want to commit to memory:

Treasury bills

  • Weekly issuance (all but 1 year T-bill)
  • Monthly issuance (1 year T-bill)

Treasury notes

  • Monthly issuance

Treasury bonds

  • Quarterly issuance

If you review the auction schedule, you may notice that real-world auction timing doesn’t always match these simplified timeframes. The Treasury may increase auctions when it needs more funding (for example, during the COVID-19 crisis) and reduce them when it needs less. The frequencies listed above are generalities, which is what the exam tends to test.

The US Government offers Treasury bills in these maturities:

  • 4 weeks
  • 6 weeks
  • 8 weeks
  • 13 weeks
  • 17 weeks
  • 26 weeks
  • 52 weeks

Treasury bills are sold at a discount to par value. Because they’re short-term and don’t pay semi-annual interest, the investor’s interest is the difference between the purchase price and the par value received at maturity.

For example, an investor buys a one-year Treasury bill for $970. One year later, the US Government pays $1,000 (par), so the investor earns $30 of interest.

Cash management bills (CMBs) are very similar to Treasury bills. They’re issued at a discount, are zero coupon, and mature at par. The Treasury issues CMBs to cover short-term funding gaps when spending rises unexpectedly, so they’re issued on an “as needed” basis (not on a formal schedule). CMB maturities vary based on the Treasury’s needs and can be as short as one day.

Treasury notes are interest-paying, intermediate-term US Government bonds typically issued monthly. Treasury notes are typically sold at par, pay semi-annual interest, and mature within 2-10 years of issuance. Although lightly tested, Treasury notes are generally offered in 2-year, 3-year, 5-year, 7-year, and 10-year intervals.

Treasury bonds are interest-paying, long-term US Government bonds typically issued quarterly. Treasury bonds are sold at par, pay semi-annual interest, and mature within 30 years of issuance. Although lightly tested, Treasury bonds are generally offered in 20-year and 30-year intervals.

Sidenote
Callable Treasuries

Starting in 1985, the US Treasury no longer issued callable securities. Before then, some 30 year Treasury bonds used to be callable. All of those bonds have since been redeemed, so it’s safe to assume all US Treasury securities today are non-callable.

Key points

US Department of Treasury

  • Runs finances of the US Government

US Government debt denominations

  • Minimum of $100

Treasury bills

  • Short-term zero coupon debt
  • Generally issued on a weekly basis
  • 1 year T-bill issued monthly
  • Issued at discounts and mature at par
  • Available maturities:
    • One month (4 weeks)
    • One and a half month (6 weeks)
    • Two months (8 weeks)
    • Three months (13 weeks)
    • Four months (17 weeks)
    • Six months (26 weeks)
    • One year (52 weeks)

Cash management bills (CMBs)

  • Short-term, zero coupon treasury securities
  • Issued to close short-term funding gaps
  • Maturities as short as one day

Treasury notes

  • 2-10 year maturities
  • Pay interest semi-annually
  • Generally issued on a monthly basis

Treasury bonds

  • Up to 30-year maturities
  • Pay interest semi-annually
  • Generally issued on a quarterly basis

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