Introduction
U.S. Treasury bills (T-bills) are short-term debt instruments issued by the U.S. Department of the Treasury to finance government operations. These securities are considered risk-free due to their backing by the U.S. government, making them a benchmark for short-term interest rates. T-bills are issued at a discount to face value and do not pay periodic interest; instead, investors earn returns through price appreciation upon maturity.
This assignment focuses on pricing a US Treasury bill (CUSIP: 912796Y45) and calculating its yield using practical methods. You will also analyze how interest rate changes impact its price and explore different yield measures to understand its valuation.
Assignment Objective
The primary goal of this assignment is to:
Understand how Treasury bills are priced and how their yields are calculated.
Retrieve and analyze market data for a US Treasury bill (CUSIP: 912796Y45).
Perform yield calculations and interpret the results using discount yield, bond equivalent yield, effective annualized yield, and other relevant measures.
Assess interest rate sensitivity, understanding how changes in the discount rate impact the price of the T-bill.
After the assignment, you'll be able to price any Treasury bill security and assess its sensitivity to interest rate changes.
Instructions
01. Understand the Treasury Bill (CUSIP: 912796Y45)
US Treasury bills are sold at a discount from their face value (typically $100) and do not pay periodic interest. Instead, their yield is derived from the difference between the purchase price and the face value received at maturity. Download "13W US Treasury Bill_912796Y45"
Download the trade dataset! It contains relevant information about the trade.
02. Market Data Collection
To accurately price the 13W US Treasury Bill (CUSIP: 912796Y45) and analyze its yield, you'll need to collect real-time or historical data from reliable sources. You can use the following sources:
U.S. Treasury Website: for official interest/discount rates data.
Federal Reserve Economic Data (FRED): to access discount rates.
https://fred.stlouisfed.org/series/TB3MS
Treasury Direct Website: to access auction results.
https://www.treasurydirect.gov/auctions/announcements-data-results/
Yahoo Finance API (for Python users): for automated data extraction.
Retrieve the latest market prices and discount rates for the 13-week U.S. Treasury bill (CUSIP: 912796Y45). Record the discount rates and the features of the Treasury Bill.
03. Calculate the Discount Yield and Price
Once you have the market data, calculate the price using the formula. Ensure you adjust for the exact days to maturity.
The formula for calculating the price using the discount yield is:
Price = Face Value x (1 - (Discount Rate x (Actual Days to Maturity / 360))
Where:
Price: The current price or present value of the T-bill.
Discount Yield: The annualized yield based on the Actual/360 day-count convention.
Actual Days to Maturity: The number of days remaining until maturity.
Calculate the Bond Equivalent Yield (BEY) and Effective Annual Yield (EAY) for the Treasury bill using appropriate formulas discussed during our sessions.
Bond Equivalent Yield (BEY) is devised to compare the return of short-term money market instruments with longer-term bonds. It annualizes the EY with the Actual/365 day-count convention without accounting for compounding.
BEY = ((FaceValue - PurchasePrice) / PurchasePrice) * (365 / Days to Maturity)
It is a standardized measure that compares short-term yields with bond yields, making it easier for investors to assess relative returns.
Effective Annualized Yield (EAY) is a true annual rate of return that accounts for the compounding effect throughout the year. It is especially useful for comparing investments with different compounding intervals.
EAY = (1 + (FaceValue - PurchasePrice) / PurchasePrice)^(365 / Days to Maturity) - 1
It provides the most accurate reflection of true return on investment by incorporating compounding effects.
Interpret your results and explain how changes in interest rates affect the price and yield of this Treasury bill. Discuss the relationship between the discount basis yield and bond equivalent yield. Perform a sensitivity analysis by changing the discount rate and observing its impact on the price.
04. Submit Your Valuation Report
Submit a PDF report that includes the following: (1). data source and a snapshot of the data collected, (2). step-by-step calculation process, (3). snapshot of the excel calculations (Python code, if any), and (4). analysis and interpretation of results.
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