In yesterday's editions an article in Business and Finance on Treasury bills should have referred to one thirty-second of a point as being the equivalent of $.03125. Also, the discount rate is the yield on the bill's face value, not the amount invested.
Like stocks, U.S. Treasury bills and bonds also have been affected dramatically by the Federal Reserve's weekend decision to tighthen credit. Government securities posted record declines during the first two days of trading this week, with holders of Treasury bills and bonds showing a sizeable paper loss.
But because most individual purchasers of short-term Treasury securities -- 13 weeks to two years -- buy them with the intention of keeping them to maturity, the loss would only occur if they were forced to sell. On the other hand, persons seeking to buy outstanding Treasury securities from dealers will find that the prices have gone down and, consequently, their yield expected, or profit, has increased.
The movement in the market can be illustrated best by tracking two issues. The calculations were worked out by the Treasury.
Say that Jones bought a two-year, $1,000-face-value note with an interest rate of 10 1/8 (or 10.13) percent on Oct. 3. He paid $998.50 for it. That means the note will yield, or really net Jones, 10.21 percent interest annually, payable every six months, if he keeps it for two years. But if Jones had sold the Treasury note to Smith yesterday, Smith would have paid only $977.50 for it. Jones would have sustained a loss of $21, or 2.1 perecent of his outlay.
Because Smith paid less for the 10 1/8 note (the interest rate remains the same), his actual yield works out to 11.15 percent. Thus the yield on this note has risen 94 basis points (hundredths of a percent) from 10.21 to 11.15, or 9.2 percent, in one week.
In bond and note tables carried in nespapers, fractional changes in bid and asked prices are expressed not in cents but in thirty-seconds of a point. Each point equals $.03125. Thus the figure 98.8 means $98 per $100 invested, plus eight thirty-seconds, or 25 cents. That works out to $980.25 per $1,000 note. The yield is given in decimal percentages.)
Another example is the latest six-month Treasury bill sold Oct. 1. Treasury bills are sold at a discount off the $10,000 face value, so the buyer effectively collects interest in advance. The price of this issue was $9,478, for an equivalent coupon yield of 11.08 percent. If Jones had sold his Treasury bill to Smith on Oct. 9, he would have incurred a loss of $41. Buying the bill at that price, Smith's equivalent yield rises to 12.24 percent.
(In the tables, bills are listed by their maturity dates, so a Treasury bill purchased Oct. 1 can be found under 4-3, or April 3, 1980. The price is indicated by discount percentage changes. On Oct. 1 the discount rate (or the yield on the actual amount paid, not the bill's face value) was 10.33 percent. By Oct. 9, it had risen to 11.51, for a gain of 1.18 points, or an 11.4 percent-increase.)
It should be noted that the prices quoted in the tables are based on transactions involving multi-million-dollar lots. Should the holder of a $1,000 note or a $10,000 bill try to sell it to a dealer or a bank, he undoubtedly would be quoted a less favorable rate. In some cases, traders actually charge a $25 fee because of the nuisance value of such small transactions. So participants in the earlier examples more properly should be labeled Jones Corp. and Smith Bank.
In the examples given, the rise in Treasury securities yield since last Friday has paralleled the increase in th federal funds rate of just over one percentage point. The yield increases range from one-quarter percent on 30-year issues to 1 1/8 to 1 1/4 on 13-week bills. So today's buyer of short-term securities is just keeping up with the Fed's increases.
On the other side of the ledger, holders saw their Treasury notes and bonds drop by as much as 2 3/8 points during Tuesday's market slump, a modern record. Corporate and municipals bonds dropped by corresponding amounts. Unlike individual bond holders, large institutional holders such as banks have become obliged to sell part of their portfolios to meet customers' loan demands.
They cannot afford to keep bonds paying 10 percent when the cost of money to buy those bonds has reached 14.5 percent or more. As they sell, prices decline. At the same time, yields go up.