Treasury Funds and Zero-Coupon Bonds Study Guide

This set covers the classification of different Treasury bond funds, the specific securities they contain (T-Notes, T-Bonds, STRIPS, T-Bills), and the various risks associated with zero-coupon bonds.

Treasury Bond Fund

A fund focusing on intermediate and long-term Treasuries, typically including T-Notes ($2$, $5$, and $10$ years) and T-Bonds ($20$ and $30$ years).

STRIPS

Zero-coupon Treasuries that are included in Treasury Bond Funds because they are considered Treasury securities.

T-Bills

Treasury securities with maturities of $< 1$ year that are usually NOT included in Treasury Bond Funds because they are too short-term and liquid.

Treasury Money Market Funds

Funds consisting of very short-term, liquid, and low risk instruments like T-Bills.

Short-term Treasury Funds

Funds that specifically hold Treasuries with maturities of $1-3$ years.

Interest rate risk (Zero-Coupon)

EXTREME risk for these bonds because they have the LONGEST duration due to having no coupons to reinvest, leading to huge price swings.

Inflation risk (Zero-Coupon)

HIGH risk because there are no interim coupons and all money is trapped until maturity.

Call risk

The risk that an issuer redeems the debt early, causing the investor to lose compounded gain.

Reinvestment risk

A risk related to zero-coupon bonds having no interim cash flows to reinvest, which magnifies the interest rate risk.

Duration

For zero-coupon bonds, this is at its longest because there are no interim cash flows, meaning longer duration equals bigger price swings.