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Treasury Issues Options
[By William H. Mears; CPA, JD]
Interest rate options are usually options on Treasury instruments, Treasury bills, notes, and bonds. The face values used are $1 million for Treasury bills and $100,000 for T-notes and bonds.
Purpose
With these options, a physician or other investor will bet on the direction of interest rates. When interest rates decline, the prices of bonds increase. This phenomenon has been experienced in the United States for the most part since the late 1980s. If interest rates increase, bond prices decrease.
Assessment
The value of the underlying security (the bond itself) will determine the value of the option. The investors who believe that interest rates will increase and that bond prices will go down are bearish. As bearish investors, they will buy puts and sell calls. Bullish investors will sell calls and sell puts.
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Conclusion
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Filed under: Alternative Investments, Investing, Portfolio Management |
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On Bonds
Interest rates will begin to rise when the Fed starts to taper the monetary stimulus program. And, bonds tend to fall in value when interest rates rise.
As [when] there is a greater degree of price volatility for longer bond maturities, physician-investors should move more into short-duration bond investments.
Dr. Karmichael
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Dr. K:
J. Yellen just cited labor-market weaknesses even after an unexpectedly fast decline in unemployment put pressure on Fed officials to consider accelerating their timetable for an interest-rate increase.
Yellen said that rates are likely to stay low for a “considerable period” after bond purchases end, which she said could happen following the Fed’s October meeting.
Three rounds of Fed bond-buying have helped propel the S&P 500 higher by more than 190 percent during the current five-year bull market. The gauge has rallied 6.7 percent this year amid signs the U.S. economy is recovering from a 2.9 percent contraction in the first quarter.
Bud
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