Page 73

next coupon payment, that will get added to the cost of the bond for a buy order or subtracted from the cost of the bond for a sell order.

Some brokers may also allow you to buy bonds (specifically government bonds) at Treasury auctions. In that case your order, rather than being routed to a secondary market, is entered into Treasury auctions held periodically by the Treasury Department. For example, if you are interested in 6-month Treasury bills, your order would be filled at the next Treasury auction for 6-month bills, which are generally held on a weekly basis. For other types of government bonds such as 10-year notes or 30-year bonds, your order will be executed at the going auction price whenever the next auction for your specified bonds is held. For Treasury auctions there are minimum quantities that you must specify for your buy order. Your broker would inform you of these quantities.

For buying government bonds, you have the option of circumventing your broker and going directly to the source by opening a TreasuryDirect account. TreasuryDirect is a book entry system operated by the Bureau of the Public Debt (part of the Treasury Department) which allows you to directly participate in the auctions. Opening a TreasuryDirect account is as simple as filling out an account request form specifying some information about yourself, including a bank account where your coupon payments are to be deposited. Then to order the bond of your choice, you would fill out a tender form specifying the bond, the quantity (normally expressed in $1,000 increments, known as par amounts), and the type of your bid. For your bid type you have two choices. In a noncompetitive bid your order is executed at the auction price. In a competitive bid, you can actually set your own price (by specifying a yield amount) for the bond that you are ordering. For competitive bids, your order is executed if your bid is within the price range determined by the auction, otherwise your order will not be filled. This is similar to entering limit orders with your …