Treasuries and money markets
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
17 min read · updated November 3, 2026
Rates is the biggest business on most fixed income floors, and the Treasury market sits at the center of it. Every other bond in the US, from a corporate bond to a mortgage bond, is priced as a spread over a Treasury. Dealers fund their bond inventory overnight in repo. Corporate treasurers park cash in bills and commercial paper. A first-year analyst on a rates desk spends the day quoting prices in 32nds, reading auction results and watching what the overnight funding rate does.
A first-round rates question is rarely hard math. It is "why do bond prices fall when yields rise", "what does 99-16 mean", "what is a repo". Answer those cleanly, with a number, and you stand out. This lesson starts from zero and assumes you have never priced a bond.
A bond is a set of fixed payments, and its price is what those payments are worth today. Because the payments cannot change, the price and the yield are one fact said two ways: when the yield the market demands goes up, the price has to go down. Everything else in this lesson (the three yields, the risks, how Treasuries are quoted, why repo matters) builds on that.
A bond from zero
A bond is a loan you can trade. The borrower (the issuer) sells it, the investor pays cash for it, and the issuer promises a fixed set of payments. Three numbers are fixed the day it is issued:
- Face value, also called par: the amount repaid at the end. Treasuries are quoted per $100 of face; examples often use $1,000.
- Coupon: the interest paid each year. The coupon rate is that interest as a percent of face, so a 5 percent coupon on $1,000 pays $50 a year. US Treasuries pay half of it every six months.
- Maturity: the date the face value comes back.
None of those three ever change. What changes is the price, and the price is just the present value of the payments that are left: each one divided by one plus the market's required return, once for every year you wait for it.
Worked example. Take a 3-year bond with $1,000 face and a 5 percent annual coupon (annual to keep the arithmetic short). It pays $50, $50, then $1,050. Say the market now wants 6 percent on a bond like this.
| Year | Payment | Divided by | Worth today |
|---|---|---|---|
| 1 | $50 | 1.06 | $47.17 |
| 2 | $50 | 1.06 × 1.06 | $44.50 |
| 3 | $1,050 | 1.06 × 1.06 × 1.06 | $881.60 |
| Price | $973.27 |
At 5 percent the same three payments are worth exactly $1,000. At 4 percent they are worth $1,027.75. Nothing about the bond changed. Only the rate used to discount it did.
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Frequently asked
- Why do bond prices fall when yields rise?
- A bond's payments are fixed when it is issued. Its price is the present value of those payments, so discounting the same payments at a higher rate gives a lower price. Put the other way, if new bonds pay more, an old bond only sells once its price drops far enough that a buyer earns the new rate on it.
- What does a Treasury price of 99-16 mean?
- Treasury notes and bonds are quoted as a percent of face value in 32nds, so 99-16 means 99 and 16/32, or 99.5 percent of face. A plus sign adds half a 32nd, so 99-16+ is 99.515625. On $1 million of face value, one 32nd is worth $312.50.
- What is the difference between a repo and a reverse repo?
- They are the same trade seen from the two sides. The party that hands over securities and receives cash, agreeing to buy the securities back later, is doing a repo; it is borrowing. The party that lends the cash and holds the securities as collateral is doing a reverse repo.
- What are money market instruments?
- Debt that matures in a year or less from strong borrowers, used to park cash safely while still earning something. The main ones are Treasury bills, commercial paper from highly rated companies, bank certificates of deposit, overnight fed funds lending between banks, and repo.
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