After US Government debt is sold at Treasury auctions, those securities trade in the over-the-counter (OTC) markets. An OTC trade is one that doesn’t take place on a physical exchange like the New York Stock Exchange.
Similar to how corporate bonds are quoted, US Government debt is quoted in percentage of par format. However, instead of eighths, US Government securities are quoted in 32nds. Government bonds are quoted in 32nds because the market is larger and prices move in smaller increments. Quoting in 32nds creates more possible prices the bond can trade at.
US Government debt quotes may look different, but converting them to a dollar price works the same way as with corporate bonds.
An investor finds three separate quotes for the same bond:
- 95-8
- 95:8
- 95.8
US Government quotes can use a dash, colon, or period. Even though you don’t see a written fraction, each quote translates to a bond price of 95 and percent of par. The number on the right side of the quote (after the dash, colon, or period) is always assumed to be in 32nds. Unlike corporate bonds, you don’t reduce the fraction.
If you use the same “fraction-boot-scoot” method we used with corporate bonds, you can convert the quote to a price. The only difference is that the fraction is in 32nds. Let’s walk through a few examples.
A US Government bond is quoted at 95-8. What is its price?
Step 1: calculate the fraction
Step 2: boot the decimal back to the big number
Step 3: scoot the decimal once over to the right
Think you can do it on your own? Give it a try!
A US Government bond is quoted at 103:20. What is its price?
Step 1: calculate the fraction
Step 2: boot the decimal back to the big number
Step 3: scoot the decimal once over to the right
As you can see, the process is very similar to the way we approach corporate bond quotes. The quotes look different, but the method is the same: both corporate and US Government securities are quoted in percentage of par format.
Treasury bill quotes are an exception. Because Treasury bills are short-term, zero-coupon securities, they’re quoted in “discount yield” form. In other words, the quote is given as a yield that reflects the bill’s rate of return.
For example, a Treasury bill quote might look like 3.2%. Instead of giving a dollar price, the quote tells the investor the overall return (yield) of 3.2% based on the bill’s discount. Remember, Treasury bills are bought at a discount, mature at par, and don’t pay a coupon.
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