T bill coupon rate
T bill coupon rate
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
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

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Re: T bill coupon rate
TBills do not have coupons. You must be referring to TNotes or TBonds purchased on the secondary market.fittan wrote: ↑Tue May 23, 2023 7:58 am 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
Best regards, Op 

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Re: T bill coupon rate
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).
Re: T bill coupon rate
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.
Re: T bill coupon rate
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.fittan wrote: ↑Tue May 23, 2023 7:58 am 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
Some people like buying a bond for the biggest discount. Other people prefer to get larger periodic interest payments, as exodusNH mentioned.

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Re: T bill coupon rate
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.
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Re: T bill coupon rate
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 yieldtomaturity (YTM). [ * ] This is shown on row 14 of the table below comparing the 2.5% 10year note issued 8/15/2013 to the 17week 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.Tom_T wrote: ↑Tue May 23, 2023 8:25 amIf 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.
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 =B7B6
9 Days prev coupon to settlement 97 97 =B2B6
10 Days settlement to next coupon 84 84 =B7B2
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/B121
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)
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 semiannually. 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)
Last edited by #Cruncher on Wed May 24, 2023 6:36 am, edited 1 time in total.
Re: T bill coupon rate
Yes, thanks for the correction. It wasn't clear from the OP which Treasuries he was looking at.#Cruncher wrote: ↑Tue May 23, 2023 9:20 amIf 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 yieldtomaturity (YTM). This is shown on row 14 of the table below comparing the 2.5% 10year note issued 8/15/2013 to the 17week 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.Tom_T wrote: ↑Tue May 23, 2023 8:25 amIf 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.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
(I've added row 16 to show the same YTM with the Excel YIELD function.)Code: Select all
8 Days in current interest period 181 181 =B7B6 9 Days prev coupon to settlement 97 97 =B2B6 10 Days settlement to next coupon 84 84 =B7B2 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/B121 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)
 Charles Joseph
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Re: T bill coupon rate
All TBills are zero coupon and noncallable. Therefore there is no coupon and no "yield to worst."fittan wrote: ↑Tue May 23, 2023 7:58 am 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
Re: T bill coupon rate
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.
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