The U.S. Treasury periodically needs to borrow money to finance the operation of the government. When the Treasury needs to borrow money it issues instruments called bills, notes or bonds, each of which are basically nothing more than an “I owe you.”

All Treasury instruments also have defined maturity ranges. In addition, each Treasury instrument has a certain denomination attached to it. For example, a Treasury bill, or “T-bill,” is a short-term instrument that’s worth $1,000 and matures within a year.

U.S. Treasury securities—such as bills, notes and bonds are debt obligations of the U.S. government. When you buy a U.S. Treasury security, you are lending money to the federal government for a specified period of time.

How it work

Treasury instruments are issued through an auction process. T-bills, which are short-term in nature, are mostly auctioned on Mondays. Four-week T-bills, meaning they mature in 4 weeks, are auctioned by the Treasury on Tuesdays. Treasury notes and bonds are auctioned as needed and pay face value at their maturity date. All T-notes and T-bonds pay a stated interest rate on a semi-annual basis. T-bills are sold at a discounted rate; with a typical $9,700 1-year T-bill paying about $10,000 at maturity.

The US Treasury Department periodically borrows money and issues IOUs in the form of bills, notes, or bonds (“Treasuries”). The differences are in their maturities and denominations:

How to buy

All standard Treasury instruments are available for sale to the general public through the U.S. Treasury’s TreasuryDirect program. Treasury instruments sold through the TreasuryDirect program come with no fee or a low fee, depending on the instrument purchased. You can also purchase U.S. Treasury instruments through banks and brokers, though they’ll typically charge a commission fee. If you buy Treasury instruments through banks or brokerages, normally you also have to open an account.

Payment & Rewards

All Treasury instruments are negotiable, meaning they can be sold at any time at a price you negotiate for with a willing buyer. “Treasuries,” as Treasury instruments are usually called, can also be pledged as collateral for things such as loans. Treasury instruments purchased through the TreasuryDirect program, though, can’t be pledged as collateral in some cases. Treasury instruments are also considered the safest investment in the United States because they’re backed by the full faith and credit of the nation itself.

Risk which is common to an entire class of assets or liabilities. The value of investments may decline over a given time period simply because of economic changes or other events that impact large portions of the market. Asset allocation and diversification can protect against market risk because different portions of the market tend to underperform at different times. also called systematic risk.

One of six risks defined by the Federal Reserve.

The risk of an increase or decrease in the market value/price of a financial instrument.

Market values for debt instruments are affected by actual and anticipated changes in prevailing interest rates.

Market values for all financial instruments, except direct obligations of the U. S. Treasury, are affected by either actual or perceived changes in credit quality.’ market risk’ includes reinvestment risk – that is, the risk that all or part of the principal may be received when interest rates are lower than when the security was originally purchased.

In that case, the principal must be reinvested at a lower rate than that originally received. Sometimes called market value risk.

Also see interest rate risk and price risk.

Background

From January 1st, 1998, internationally-active banks in G-10 countries had to maintain regulatory capital to cover market risk.

This is the risk to an institution’s financial condition resulting from adverse movements in the level or volatility of market prices of interest rate instruments, equities, commodities and currencies. Market risk is usually measured as the potential gain/loss in a position/portfolio that is associated with a price movement of a given probability over a specified time horizon. This is typically known as value-at-risk (VAR). An institution with a 10-day VAR of $100 million at 99% confidence will suffer a loss in excess of $100 million in one fortnightly period out of 20, and then only if it is unable to take any action to mitigate its loss.

Many banks calculate one-day VAR numbers which are then compared with actual daily profits and losses. It is much easier for them to scale up these numbers by the square root of 10 to meet the 10-day holding period laid down by the Basle Committee than to start afresh. But scaling up daily numbers to reflect a longer unwind period is fine for linear products such as forwards and swaps but not good enough for options and products with embedded options. Extrapolating daily VAR numbers does not capture the gamma or curvature risk of such products. The best way of capturing this curvature is to use longer holding periods which explains why the Basle Committee opted for a 10-day holding period. But the Committee wanted to limit industry burden in complying with its pronouncements and thus decided that banks could scale up their one-day numbers for a limited period. These banks are however asked to assess the option risk in their portfolios by applying Monte Carlo simulation and/or stress testing.

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During 2007 and 2008, the entire SWIFT Network migrated its infrastructure to a new protocol called SWIFT Phase 2. The main difference between Phase 2 and the former arrangement is that Phase 2 requires banks connecting to the network to use a Relationship Management Application (RMA)instead of the former Bilateral key exchange (BKE) system. According to SWIFT’s public information database on the subject, RMA software should eventually prove more secure and easier to keep up-to-date; however, converting to the RMA system also meant that thousands of banks around the world had to update their international payments systems in order to comply with the new standards. RMA completely replaced BKE since January 1, 2009.

SWIFT also offer a secure person-to-person messaging service, SWIFTNet Mail, which went live on 16 May 2007.[7] SWIFT clients can configure their existing email infrastructure to pass email messages through the highly secure and reliable SWIFTNet network instead of the open Internet. SWIFTNet Mail is intended for the secure transfer of sensitive business documents, such as invoices, contracts and signatories, and is designed to replace existing telex and courier services, as well as the transmission of security-sensitive data over the open Internet. Eight financial institutions, including HSBC, FirstRand Bank, Clearstream, DnB NOR, Nedbank, Standard Bank of South Africa and Bear Stearns, as well as SWIFT piloted the service.[8]

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SWIFT community is interesting site to keep you updated with latest

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Interest rate swaps are an agreement on the payment of cash flow in terms of a fixed interest rate as opposed to the floating and ever changing interest rate. This is a positive agreement between two parties, which are known as the counterparties. Interest rate swap helps the counterparties avoid the flux in interest rates which can be varied and undesirably liquid, and depends basically on the ever changing position of the market and currency value.

To put it in very simple terms, interest rate swap is basically exchanging one set of defined cash flows between two parties, for another set of liquid interest based cash flows. This system allows both counterparties to maintain a stable stream of cash flow, and to save much in case of changing interest rates, which tend to go up more often than not. Thus, expenses are reduced for both companies on every transaction made for a fixed period of time, to which both the counterparties have agreed in the terms and legal contracts.

Example

Interest rate swap is a derivative which provides a company protection from the ever fluctuating interest rates in the market. Thus your company will benefit from a long term contract without having to factor in market uncertainties which are often caused by the flux in interest rates. A stable rate of payment and debt provides a stable and strong financial background for future transactions and long term planning. Acquiring business transaction deals at a lower interest rate also helps reduce costs and transactional expenses in both the long term as well as short term scenarios.

What Are The Different Types Of Interest Rate Swaps?

Interest rate swaps can be employed in all scenarios, those involving same currency transactions as well as those involving transactions among different currencies. Interest rate swaps can also be fixed for floating or floating for floating interest rates. Thus, the following permutations can combinations are noted:
- Fixed for floating rate swap for the same currency
- Fixed for floating rate swap for different currencies
- Fixed for fixed interest rate swaps for different currencies
- Floating for floating interest rate swaps for same currency
- Floating for floating interest rate swaps for different currencies

How And For What Can These Interest Rate Swaps Be Used?

Interest rate swaps are employed mainly in order to hedge one’s company against exchange interest rate controls and market fluctuations. Many new and interesting uses have been found where interest rate swaps are being utilized to make transactions more beneficial for both parties. These include some legal and barely legal applications. For example, hedge funds and investors use speculation and invest in swaps in order to reap the benefits of changing interest rates by liquidating after or inter term dealings.

Other factors that influence rebate rates are the duration and re-pricing frequency of the loan.  Open loans are marked-to-market daily to allow rates to move as the funding rate moves, or as the supply and demand of the security changes.

Term loans rates are fixed at the beginning of the loan and are established for a set period
of time.   Rebate rates may be positive or negative, indicating which participant is responsible for paying interest on the cash collateral outstanding.

Trade flow
Lender → Custodian → Prime Broker → Borrower
(Shares)
Borrower → Rime Broker → Custodian → Lender
(Shares / Collateral / Rebate)
Rebate (+ ve) paid to borrower
Rebate (- ve) paid to lender

Custodian → A financial institution that has the legal responsibility for a customer’s securities. This implies management as well as safekeeping.

Forwards – A forward contract is a customized contract between two entities, where settlement takes place on a specified date in the future, at pre-agreed price, which is decided on the day of entering into contract. Both parties has obligation to fulfill the terms of contract on the agreed settlement date.

Futures- Got same definition as Forward.

But with following as major difference between Future and Forwards.

Bonds – A bond is a debt security similar to an informal debt instrument. When you purchase a bond you are lending a money to that entity who is issuers. In returns for the loan, the issuers promises to pay specified rate of interest during the life of the bond and to repay the face value of the bond when it matures or comes due.

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