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Really dumb question about buying U.S. bonds

post #1 of 3
8/9/11 at 12:01am
Thread Starter 
I have a really dumb question about calculating return on a U.S. government bond investment.

Rates are shown at the following site:

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Let's take the 8/8/2011 data as an example. The one month rate is 0.02. Does this mean that if I purchase $1,000 of this bond, I will have paid $999.80? i.e. 999.8 x (1 + 0.02 / 100) = 1,000

Are the ones longer than a year compounded annually at the rates shown?

A 1 year bond at 0.11% return seems like a silly investment... I must be interpreting this data incorrectly.


Thanks.
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post #2 of 3
8/9/11 at 12:28am
It's worse than that. Your calculation implies that you're earning 2 basis points on a monthly basis, when in actuality 2 bps is your annual return. You would have to pay $999.98 for a bond that matures in one month at $1000. At a Dallas CFA Society meeting someone appropriately referred to it as return free risk (a play on risk free return used in CAPM and other financial models).

I agree that a 1Y bond at 0.11% seems like a silly investment and almost certainly a negative real return. You can thank the Federal Reserve for the obscenely low interest rates across the board. The Bernanke has been daring investors to chase yield for years now which, in my opinion, is a major contributing factor in the rise in stock prices that we've witnessed over the past couple of years.

While not completely unexpected, the flight to safety we've seen after a US downgrade is very revealing about the implied credit rating that investors give the US.
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post #3 of 3
8/9/11 at 12:42am
Thread Starter 
haha... free risk, I like that.

Wow, that's pretty bad. So all of those are APY? Do people actually invest in these? I mean a one year CD will return at least one percent.
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