T bill coupon rate

[fittan]

Hi,
I have been buying short term T bills in my brokerage lately. I understand "yield to worst" and typically buy bills with 0% coupon rate. However, some has a "coupon rate". What is it and how should I interpret it? Specifically, if there are similar 2 bills (i.e. same maturity date and same yield to worse), but one has 0% and the other 0.25% coupon, which is the better T bill? Thanks.

Fittan

[Call_Me_Op]

Hi,
I have been buying short term T bills in my brokerage lately. I understand "yield to worst" and typically buy bills with 0% coupon rate. However, some has a "coupon rate". What is it and how should I interpret it? Specifically, if there are similar 2 bills (i.e. same maturity date and same yield to worse), but one has 0% and the other 0.25% coupon, which is the better T bill? Thanks.

Fittan

TBills do not have coupons. You must be referring to TNotes or TBonds purchased on the secondary market.

[fittan]

It is definitely T bill. The maturity are 3 to 4 weeks. You're right...I am buying it in secondary market (i.e. Merrill Edge brokerage).

[exodusNH]

It is definitely T bill. The maturity are 3 to 4 weeks. You're right...I am buying it in secondary market (i.e. Merrill Edge brokerage).

As the notes and bonds get close to maturity, they wind up in the same maturity buckets as bills. Those will show a maturity of, e.g., 3 months but have a coupon.

If you don't need interest to fund your daily expenses, pick the ones with the smallest coupons, since you'll have less reinvestment risk and maybe simpler taxes.

[Tom_T]

Hi,
I have been buying short term T bills in my brokerage lately. I understand "yield to worst" and typically buy bills with 0% coupon rate. However, some has a "coupon rate". What is it and how should I interpret it? Specifically, if there are similar 2 bills (i.e. same maturity date and same yield to worse), but one has 0% and the other 0.25% coupon, which is the better T bill? Thanks.

Fittan

The coupon rate is the interest you get paid along the way. If the two yields are the same, but have different coupon rates, pay attention to the actual price you have to pay. The one with the lower price will have a lower coupon rate; in effect, you'll be getting less interest along the way because you've been given a bigger discount on the upfront price.

Some people like buying a bond for the biggest discount. Other people prefer to get larger periodic interest payments, as exodusNH mentioned.

[RubyTuesday]

It is definitely T bill. The maturity are 3 to 4 weeks. You're right...I am buying it in secondary market (i.e. Merrill Edge brokerage).

It is definitely not a T bill , just a note or bond nearing maturity on the secondary marjet. T Bills don’t have coupons. I would probably choose actual T bill unless I wanted the coupon cash flow.

[#Cruncher]

If the two yields are the same, but have different coupon rates, pay attention to the actual price you have to pay. The one with the lower price will have a lower coupon rate; in effect, you'll be getting less interest along the way because you've been given a bigger discount on the upfront price.

If a Treasury coupon bearing note or bond matures within six months, there is no "interest along the way". The only interest payment will be at maturity along with the principal. Taking the accrued interest into account the cash flow will be exactly proportional to a Treasury bill with the same yield-to-maturity (YTM). [ * ] This is shown on row 14 of the table below comparing the 2.5% 10-year note issued 8/15/2013 to the 17-week bill issued 4/18/2023 which both mature 8/15/2023. For illustration I've set their prices on row 5 to make them both have a 5.000% YTM.

Code: Select all

Row                            Col A       Col B       Col C   Formula in Column B Copied to Column C
  2                       Settlement   5/23/2023   5/23/2023
  3                          Matures   8/15/2023   8/15/2023
  4                           Coupon      0.000%      2.500%
  5                            Price     98.8531     99.4189
  6             Previous coupon date   2/15/2023   2/15/2023
  7                 Next coupon date   8/15/2023   8/15/2023

Code: Select all

  8  Days in current interest period         181         181  =B7-B6
  9   Days prev coupon to settlement          97          97  =B2-B6
 10   Days settlement to next coupon          84          84  =B7-B2
 11                 Accrued interest      0.0000      0.6699  =100*(B4/2)*(B9/B8)
 12                       Total cost     98.8531    100.0888  =B5+B11
 13                         Proceeds    100.0000    101.2500  =100*(1+B4/2)
 14    Proceeds versus cost increase      1.160%      1.160%  =B13/B12-1
 15                Yield to maturity      5.000%      5.000%  =2*B14*(B8/B10)
 16                            YIELD      5.000%      5.000%  =YIELD(B2,B3,B4,B5,100,2,1)

(I've added row 16 to show the same YTM with the Excel YIELD function. [ * ])

Edited 5/24/2023 7:30 AM to show following footnote:
* I'm computing the T Bill's YTM as if it were a Treasury note or bond paying a coupon semi-annually. The actual reported "Investment Rate" for a T Bill is computed differently. Assuming 365 days in a year:
5.041% = (100 / B5 - 1) * (365 / B10)
We get the same result with the YIELD function if the frequency parameter is set to "1" instead of "2".
5.041% = YIELD(B2, B3, B4, B5, 100, 1, 1)

[Tom_T]

If the two yields are the same, but have different coupon rates, pay attention to the actual price you have to pay. The one with the lower price will have a lower coupon rate; in effect, you'll be getting less interest along the way because you've been given a bigger discount on the upfront price.

If a Treasury coupon bearing note or bond matures within six months, there is no "interest along the way". The only interest payment will be at maturity along with the principal. Taking the accrued interest into account the cash flow will be exactly proportional to a Treasury bill with the same yield-to-maturity (YTM). This is shown on row 14 of the table below comparing the 2.5% 10-year note issued 8/15/2013 to the 17-week bill issued 4/18/2023 which both mature 8/15/2023. For illustration I've set their prices on row 5 to make them both have a 5.000% YTM.

Code: Select all

Row                            Col A       Col B       Col C   Formula in Column B Copied to Column C
  2                       Settlement   5/23/2023   5/23/2023
  3                          Matures   8/15/2023   8/15/2023
  4                           Coupon      0.000%      2.500%
  5                            Price     98.8531     99.4189
  6             Previous coupon date   2/15/2023   2/15/2023
  7                 Next coupon date   8/15/2023   8/15/2023

Code: Select all

  8  Days in current interest period         181         181  =B7-B6
  9   Days prev coupon to settlement          97          97  =B2-B6
 10   Days settlement to next coupon          84          84  =B7-B2
 11                 Accrued interest      0.0000      0.6699  =100*(B4/2)*(B9/B8)
 12                       Total cost     98.8531    100.0888  =B5+B11
 13                         Proceeds    100.0000    101.2500  =100*(1+B4/2)
 14    Proceeds versus cost increase      1.160%      1.160%  =B13/B12-1
 15                Yield to maturity      5.000%      5.000%  =2*B14*(B8/B10)
 16                            YIELD      5.000%      5.000%  =YIELD(B2,B3,B4,B5,100,2,1)

(I've added row 16 to show the same YTM with the Excel YIELD function.)

Yes, thanks for the correction. It wasn't clear from the OP which Treasuries he was looking at.

[exodusNH]

If a Treasury coupon bearing note or bond matures within six months, there is no "interest along the way". The only interest payment will be at maturity along with the principal.

Thank you for that info!

[Charles Joseph]

Hi,
I have been buying short term T bills in my brokerage lately. I understand "yield to worst" and typically buy bills with 0% coupon rate. However, some has a "coupon rate". What is it and how should I interpret it? Specifically, if there are similar 2 bills (i.e. same maturity date and same yield to worse), but one has 0% and the other 0.25% coupon, which is the better T bill? Thanks.

Fittan

All T-Bills are zero coupon and non-callable. Therefore there is no coupon and no "yield to worst."

[MikeG62]

It is definitely T bill. The maturity are 3 to 4 weeks. You're right...I am buying it in secondary market (i.e. Merrill Edge brokerage).

If there is a coupon, it is either a Treasury Note or Bond that is 3 to 4 weeks from maturity. As others have said, Treasury Bills are all zero coupon.

To answer your question, it makes no difference in this case. You won't receive the coupon before maturity anyway.

FWIW, I buy lots of Treasuries and to me (as a retired person) I prefer a coupon if the yield is otherwise the same (or very similar). Helps provide some cash flow between the purchase date and maturity.