Treasury

The Treasury yield curve is the benchmark for pricing all other USD fixed-income securities. Its shape — normal (upward-sloping), flat, or inverted — carries information about expected growth, inflation, and monetary policy.

The exam’s favorite move is separating the par, spot, and forward curves built from Treasuries: a par rate is the YTM of a coupon bond priced at par, spot rates discount single cash flows (so a bond prices correctly as a portfolio of zeros), and forward rates are implied future single-period rates. Bootstrapping solves for each later spot rate sequentially from the shorter spot rates already found — never one flat YTM applied to every cash flow. Distinguish on-the-run (most recently auctioned, most liquid, the benchmark) from off-the-run issues. A corporate bond’s yield equals the matched-maturity Treasury yield plus a spread, with the G-spread quoting that gap directly over the government bond. Don’t call Treasuries truly risk-free — they carry interest-rate/duration and inflation risk; only their default risk is near-zero. Memory hook: “on-the-run runs the benchmark.”