Budget Issues: Treasury's Interest Rate Calculation Changes Page: 3 of 8
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Table 2 illustrates the effect that callability has on bond prices and yields by
comparing the April 15, 1999, market quotation and yield of two securities that
mature on May 2005: one a callable Treasury bond and the other a noncallable
Treasury note. Although the callable bond pays a higher coupon rate (8.25 percent)
than the Treasury note (6.5 percent), the former has a lower price and lower yield.
The Treasury note's bid was 106 19/32, or $106.59 per $100 of face value, while the
Treasury bond's bid was 103 11/32, or $103.34 per $100 of face value. The lower bid
of the callable bond reflects the market participants' expectations that Treasury will
call the bond at par value during May 2000, or 5 years earlier than its maturity date.
Thus, the yield on the bond (5.02 percent) is the yield-to-call while the yield on the
note (5.22 percent) is the yield-to-maturity.
Table 2: Treasury Securities, Market Quotations and Yields
May 2005 Note May 2000 - 2005 Bond
Coupon rate 6.5% 8.25%
Bid 106.19 103.11
Yield 5.22% 5.02%
Source: Yields provided by Treasury; coupon rate and bid reported by New York Times,
April 16, 1999.
Treasury Changed Interest Rate Calculations in 1980 and 1998
Treasury made changes in 1980 and 1998 in the calculation of the interest rates used
to determine the investment returns for a number of government trust funds. Before
1980, Treasury's manual calculations were based on the prevalent market practices
described above. In 1980, when prices of callable bonds were below par, Treasury's
computers were programmed to calculate yields on callable bonds based on yield-to-
maturity only. Treasury lawyers described the 1980 change as a "programming
shortcut that was made in the interest rate environment of the time." According to
Treasury officials, they found no documentation on the 1980 change and nothing to
indicate it was meant as a policy or methodology change.
The second change occurred in 1998, when Treasury officials discovered that the
1980 program for calculating interest rates did not conform to prevalent market
practice. Treasury changed its method of calculating rates back to calculate yield-to-
maturity when market prices are below par and to calculate yield-to-call when market
prices are above par. Although estimates of computer programming and resource
requirements to add the yield-to-call programming option in 1980 were unavailable,
'Bid is the price offered to buy securities. Prices are in units of 1/32 of 1 percent of par value.
Par value is taken to be $100.
GAO/AIMD-99-194R Treasury's Interest Rate Calculation Changes
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United States. General Accounting Office. Budget Issues: Treasury's Interest Rate Calculation Changes, text, May 28, 1999; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc295572/m1/3/: accessed September 22, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.