govtwork / faq / How treasuries are priced today

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DEPARTMENT OF THE TREASURY
BUREAU OF THE PUBLIC DEBT
WASHINGTON, D.C. 20239-0001

March 1, 2000

Mr. Joel R. Anderson

Dear Mr. Anderson:

Your letter of January 12, 2000, to Mr. Lawrence Summers was
forwarded to my office for response. I am pleased that you
would consider using TreasuryDirect. I also appreciate the
time you have spent validating our postings. The suggestion
in your letter that we made a mistake in the "Discount Rate"
published on the Bureau of the Public Debt's website
concerned me a great deal. I had one of my staff validate
these tables as well. I hope the explanation below will
satisfy your concerns and that you will use TreasuryDirect
for your investing needs.

Prior to April 18, 1983, Treasury bills were sold on a
price-basis, in which bids were submitted in dollar prices.
The equivalent discount rates were then calculated from the
prices and were rounded to three decimal places, using
normal rounding. The formula that you referred to,
describing how a discount rate is calculated, applies to
this old price-based auction.

Since that time, however, bills have been sold only on a
discount rate basis. Until 1997, bids were submitted as
discount rates with two decimals. Treasury then instituted a
change to three-decimal bidding in minimum increments of
.005 %, and this type of auction is in use at the present
time. The equivalent price is determined from the discount
rate, using the formula shown below. For this example on the
succeeding page, we have used the discount rate that
resulted from the January 10, 2000, auction that you said
was in error in your letter to Secretary Summers.

    Formula: P= 100(1 -dr/360)
           Where d = discount rate, in decimal
                 r = number of days remaining to maturity
                 P= price per 100 (dollars)



                                                    Page 2

Example:


Definition d = 5.235% or .05235 (discount rate awarded in auction)
           r = 91 days (January 13, 2000, to April 13, 2000)

           Resolution:

                1)   P = 100[1 - (.05235) (91) / 360]
                2)   P = 100(1 - .013232917)
                3)   P = 100(.986767083)
                4)   P = 98.6767083
                5)   P = 98.677


Again, I hope this information is of assistance. Thank you
for your interest in Treasury securities. If you have any
questions, please feel free to call either me, Barbara
Charles or Linda Martinez at (202) 691-3550.

Sincerely,

Michael W. Sunner
Deputy Assistant Commissioner
(Financing)