UNIVERSITETI ALEKSANDR MOISIU FAKULTETI I STUDIMEVE T INTEGRUARA ME PRAKTIKN (FASTIP)

BANK MANAGEMENT FIRST YEAR

Project Work I

Topic: Treasury Bonds: Investment in government security

Submitted by: Enos Dauti Date: 30.08.2010

1.Introduction
A treasury bond is a negotiable, coupon-bearing debt obligation issued by the government and backed by its full faith and credit, with ranging maturity from one to thirty years from the date of issue.1 Also called government security, this derives from the fact that they have the security of the government in paying them back. Treasury bonds comprise part of the financial instruments in the hands of the state to manage the economic environment. Moreover, treasury bonds are referred as government debt, because the it sells its debt to finance its deficit. In addition, at the maturity period of the bond the government pays the intended yield as well as the principal invested arisen from the governments received revenue.

Nevertheless, out of such statements there are some simple questions arising. What was the trigger of initiation of such a monetary instrument to be invented? Who does it benefit the most? Would economy be the same without its usage? And lastly, is it possible that once the government implemented such a tool to simply cease its usage, pay back all the investors, and have sufficient budget to continue project financing without borrowings?

1.2 Historical background to public debt

Sophisticated as it is, the state issued bond, is believed to be part of todays modern world economy, but regarding to historical records, it dates back far from what is commonly known. It is in the early Middle Age, in the twelve century, when bills of exchange, with transferability to third parties through endorsement, were used 2. It was the simple fact of taxation of more or less predictable revenue streams that provided the earliest system of public debt in medieval Italy. The Venetian public debt, which originated in the twelfth century, was secured on the states salt monopoly, the revenues of which were earmarked for debt service and redemption. In the fourteenth century the increasing
1 2

Treasury Bond definition, http://www.investorwords.com/5061/Treasury_Bond.html Ferguson, N., The Cash Nexus; Money and Power in the Modern Word,1700 2000, pg. 107.

use of forced loans (prestiti) as a form of taxation further increased the importance of the debt.3

As it is usually happens, when a new instrument regardless of the nature of use, and with reference to the fact that it becomes an indivisible part of the aspects of life it is used, it evolves in accordance to the frequent changing needs of the demand and supply of this same instrument. In terms of the public debt, its management developed accordingly. An important development here was transferability, where in Florence; the communal debt was systematically increased by the fiscal heavy reliance of the forced loans. 4 What we see so far is the fact that the government, being aware of its power and competence in regard to the laws they issued, provided itself with a supporting policy to finance their budget deficit, and saw public borrowing as an inevitable tool to manage its portfolio.

1.3 Development approach to current days

However, with the evolution of the society, and the radical changes occurred in the political systems up to the recent days, with regard to the current legal system, it is impossible and illegal to impel lenders to invest in the government deficit. In addition, what we see as todays government security is the Treasury bond, which with connection to the principal invested, it is possible to gain interest accordingly, and this way the government attracts investors5. This is in contrast to the initial usage, where people were compelled to buy the budget deficit. When the government needs to borrow money, it issues bonds in various denominations or face values. The face value is returned to you on the bond's future maturity date and you get paid interest in the interim. 6

3 4

Ferguson, N., cited, pg.107 Ferguson, N., cited, pg.108 5 Government Bond, http://en.wikipedia.org/wiki/Government_bond 6 Government Bond, National Bank; Financial.

In other words, it builds up its reputation and confidence in people on its ability to pay back and rewarding its investors with the received yield. Furthermore, it provides itself and others with mutual reliance in future investments.

2. Operating with government security

Treasury bonds are issued by the government in order to pay for government projects. The money paid out for a Treasury bond is essentially a loan to the government. As with any loan, repayment of principal is accompanied by a fixed interest rate. These bonds are guaranteed by the 'full faith and credit' of the government, meaning that they are extremely low risk (since the government can simply print money to pay back the loan) 7. The most real risk for investors comes from the decrease of the real value of profit. In other terms, from the increase of the inflation rate, or the depreciation of the ALL compared to other foreign currencies8.

2.1 Open Market Operation

Open market operations are one of three basic tools used by the Federal Reserve (or any other Countrys Central Bank) to reach its monetary policy objectives. The execution of OMOs in the "open market"also known as the secondary market for securities purchasesis the Federal Reserve's most flexible means of carrying out its objectives 9. Differently put, this means that it is through OMO that the state provides the instruments to conduct its predicted monetary policy to achieve the desired outcome on ones country economic environment.

The money marketwhich includes the federal funds marketprovides the natural point of contact between the Federal Reserve and the financial system. The money market is a term used for wholesale markets in short term credit or IOUs, comprising debt instruments maturing within one year. The market is international in scope and helps in

8 9

Treasury Bonds, www.Investorguide.com Kaiku, E., Treasury Bonds, Hapesire, April 16 2007,pg 22. Open market operations, http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html

economizing on the use of cash or money. 10 Open market operations by the Federal Reserve involve the buying and selling of government securities in the secondary market in which previously issued securities are traded.11 In addition, what we see as beneficiary to the state is the way it provides itself with the funds to finance its budgeted projects and moreover prevent economic crumps due to lack of money.

The government sells Treasury bonds by auction in the primary market, but they can also be purchased through a broker in the secondary market. A broker will charge a fee for such a transaction, but the government charges no fee to participate in auctions. Treasury bonds are marketable securities, meaning that they can be traded after the initial purchase. Additionally, they are highly liquid because there is an active secondary market for them. Prices on the secondary market and at auction are determined by interest rates. Treasury bonds issued today are not callable, so they will continue to accrue interest until the maturity date.12

2.2 Classification of bonds

The government issues large variety of securities as part of financial instruments, that will contribute to finance the occurring budget deficit. There are three main distinguishable types of bonds in accordance to their period to maturity. Furthermore, this kind of classification is not only used for the simplicity of creating taxonomies under which to define the terms and conditions of the bond issued. What is seen applicable in this aspect is the fact of whos to benefit. In such terms, this means that the state organizes the securities issued in accordance to its needs, whether they are long run, or short run needs. Yet, it also provides appealing diversification to investors to meet their need on the length of time they are willing to lend their money to the state, and the proximity of time in which they desire to obtain back the principal invested to

10 11

12

Akhtar, M. A., Understanding open market operations, pg.7. Akhtar, M. A., Cited, pg.35 Treasury Bonds, www.Investorguide.com

re make use of it. Despite the fact that bonds seem appealing to the point of mutual satisfaction, in case the government would not be in necessity of liquidity, it is believed that the bonds issuing would not occur in the first place. There are three types of securities issued by the U.S. Treasury. These are distinguished by the amount of time from the initial sale of the bond to maturity.

Treasury bonds

These securities have the longest maturity of any bond issued by the U.S. Treasury, from 10 to 30 years. The 30-year bond is also called the "long bond." Denominations range from $1000 to $1 million. T-bonds pay interest every 6 months at a fixed coupon rate. As mentioned above, these bonds are not callable, but some older T-bonds available on the secondary market are callable within five years of the maturity date.

Treasury notes T-notes have maturities between 1 and 10 years. Denominations range from $1000 to $5000 and are determined by the amount of time to maturity. Like T-bonds, these securities pay interest semi-annually at a fixed coupon rate.

CPI-indexed Treasury Notes (TIPS) TIPS are inflation-indexed securities issued by the U.S. Treasury in an effort to widen the selection of government securities available to investors. The notes have a 10 year maturity and pay interest at a fixed rate. The principal increases with the inflation rate, which in turn increases future interest payments. One danger associated with investing in TIPS is that taxes are due on the increased principal before maturity when the investor gains access to the principal. In times of high inflation, tax payments could even exceed the interest income earned by the note.

Treasury Bills

T-bills are available with maturities of 13 weeks, 26 weeks and 52 weeks. They are purchased at a discount to their $10,000 face value, and the full amount is received at maturity (making them zero-coupon). The bills are sold at auction where the price of sale is determined by how much the bill is worth on the date of issue, which depends mainly on interest rates.13

2.3 Practical demonstration

An attraction with bonds is that you don't have to wait until maturity to earn your full return. You can sell them in the bond market before they mature - and hopefully profit doing so. Whether you profit will mostly depend on what has happened to general interest rates since you bought the bond. If rates have come down, you will likely be able to sell the bond for more than you paid. If they've risen, however, you'll probably lose on the sale. Say you pay face value for a $1,000, 10-year bond paying 10%. Two years later, you decide to sell when interest rates have dropped and similar bonds are yielding 8%. Instead of selling your bond for $1,000, you can sell it for more because it's 10% coupon is attractive. So you sell the bond for $1,085, giving you an $85 profit that pushes up your return to 14.25%. Eight years later, the person who bought the bond will get back its $1,000 face value, leaving a loss of $85. Spread out over the bond's remaining eight years, that loss reduces the buyer's return to about 8%. Other factors besides interest rates can affect bond prices, such as the issuer's credit rating, the term to maturity, and the bond's coupon rate. 14

What is seen as the logic behind such open market operation is the willingness to risk on the predictability of the interest rate. If the bond yield is higher than that of the market, there is an evident profit on the side of the one who initiates the first instance of selling. On the other hand, the second buyer has to risk on the fact that the market interest will remain in such proportions to gain the desired reward out of the yield or if odds are that he will be in need of liquidity. In the case that the market interest increases beyond the one
13 14

Treasury Bonds, www.Investorguide.com Government Bond, National Bank; Financial.

printed on the bond, and the case is that if same buyer needs immediate liquidity, he can sell it for less that he actually paid and resulting in loss. The contrary would occur if the interest is constantly changing in negative proportions; it may be the case for him to decide to resell the bond in order for him to make profit out of the bond, without waiting its maturity.

3. Albanians investments retrospective

Out of historical records it is known that Albania has been under a dictatorship regime for almost fifty years, and as a result its economy was far from the competitive market. In accordance, economic knowledge was not applicable to all the population of the country. In addition, there was substantial lack of information regarding financial institutions, economic approaches as well as reasoning in such terms. However, it was not until the late 90s that Albania changed its form of regime, making so a giant leap from total isolation to direct democracy. When Albania started the transition from central planning to a market economy, it was the poorest and most isolated and backward country in Europe. For centuries, Albania had been largely unknown and inaccessible, and, from 1945 to 1985, its isolation was compounded by the rigid communist dictatorship, which eliminated almost all forms of private property and virtually cut the country off from outside influences and information. 15 The banking industry remains the largest and the most development segment of the Albanian financial market. The banking sector plays an important role in economy but it cannot be considered isolates from historical political and economic environment 16.

What is seen as inevitable, is the gap of development between the two kinds of government. A gap that would reflect in the years to come as the worst case scenario in managing the market.

15

16

Jarvis, C., The rise and the fall of Albanias pyramid scheme. Tushaj, A., Market Concentration in the Banking Sector: Evidence from Albania, pg. 5

3.1 Bad investments

Initially, the banking sector before the 90 was a mono bank. Bank deposits were the only officially available savings / investment instruments for individuals in socialist Albanian economy17. After the fall of communism, the young, yet vibrant private sector was generating an increasing amount of domestic savings, along with remittances from about 400,000 Albanians working abroad, mainly in Greece and Italy. In 1995 private savings reached almost 15 percent of GDP, or $350 million (up from practically zero, two or three years earlier). Those savings, combined with remittances from abroad, totaled more than $600 million in 1995 and more than $700 million in 1996 18.

Deriving from the fact that the overall conditions were led by the unknown, it was easier for differently skilled people to create informal financial institutions and to convince others to deposit their money, which consequently came the rise of the Pyramid schemes. The pyramid scheme phenomenon in Albania is important because its scale relative to the size of the economy was unprecedented.19

The new class of inexperienced account owners became easy targets for swindlers, who promised exorbitant interest rates for those who joined their schemes. At the beginning they kept their promises, paying their obligations from the next wave of investors' money. Deriving from the fact that these kind of deposit taking individuals appeared for the first time, regardless from the nature of their intention, they had to be fair to the depositors. In such terms, they returned the promised interest and the amount of money to the first depositors in order to build up confidence, and to attract more to come.

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18

Tushaj, A., Cited, pg.5 Elbirt, C., Albania under the shadow of Pyramids. 19 Jarvis, C., cited.

This is why such schemes are called pyramid 20schemes: the bottom layers of deposits must grow fast in order to keep the system running 21. The wide appeal of Albania's schemes can be attributed to several factors, including Albanians' unfamiliarity with financial markets; the deficiencies of the country's formal financial system, which encouraged the development of an informal market and, within this market, of the pyramid schemes; and failures of governance. 22

The informal lending companies were initially regarded as making an important economic contribution. However, deposit-taking companies invested on their own account instead of making loans. These companies were the ones that turned into pyramid schemes.23

3.2 How did the schemes operate?

In a typical pyramid scheme, a fund or company attracts investors by offering them very high returns; these returns are paid to the first investors out of the funds received from those who invest later. The scheme is insolventliabilities exceed assetsfrom the day it opens for business. However, it flourishes initially, as news about the high returns spreads and more investors are drawn in. Encouraged by the high payouts, and in some cases by showcase investments and ostentatious spending by the operators, still more people are drawn in, and the scheme grows until the interest and principal due to the early investors exceeds the money paid in by new investors. To attract new investors, a scheme may raise interest rates, but the larger interest payments soon force it to raise rates again. Eventually, the high rates begin to arouse suspicion or the scheme finds itself unable to make interest payments. When investors try to get their money out, they discover the truth about the scheme, whose demise is swiftand usually accompanied by acts of outright theft by the operators, if they are not caught first 24.

20
21

See picture 1 Page 18 Elbirt, C.,cited. 22 Jarvis, C., cited. 23 Jarvis, C., cited. 24 Jarvis, C., cited.

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It seems obvious that the continuous raise of the interest rates would imply that the scheme operator would have to increase the interest rate of return revenue constantly in order to attract more investors in order pay the previously claimed interest. In a scaling approach, it would come to the case that he/she would actually bring the interest rate up to 100% or more, due to competition, and at the yield to maturity it would be impossible to pay back the investors. As result, such a fear would arise from the same word of mouth that brought its popularity in acquiring the populations found, the very same would make people to Run at the scheme. In addition with its liabilities exceeding its assets, not only he/she would make no profit, despite the result of losses is clearly eminent, but what would be the results in terms of paying back? How would people react ? Experts and other professionals predicted what was going to happen and warned the government of time, the case was sent to a trial, but the frail legal framework favored such a scheme25. From this experience, the legal framework was prepared and empowered to prevent such a scenario from repeating. The bank of Albania is the only financial institution that plays the regulatory role. Out of the traumatic experience in the 1997, with the collapse of the pyramid schemes that dried up the populations savings overnight, Albania was induced to anarchy, where the people reacted very violently 26. Government revenues collapsed as customs posts and tax offices were burned 27. Preventing states income would mean an inevitable end. The lack of revenue would leave the state out of funds to invest in the future prosperity of its own country. Somehow, this can be associated with the fact that the population blamed the government for their own losses, and if they did not have any assets, the government would neither. After 1997 crisis, the macroeconomic environment led to important changes in Albanian banking sector which was involved in liquidation, restructuring, privatization and

25 26

Elbirt, C.,cited. Fuster, T., The Truth and the Surface in the Albanian economy. Shekulli. 27 Jarvis, C., cited.

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acquisition activities of some banks28. This, in order to build up confidence and to develop the sector of financial institutions.

4. Central Banks role

Most of the nations central banks are responsible for formulating and implementing monetary policy. The formulation of monetary policy involves developing a plan aimed at pursuing the goals of stable prices, full employment and, more generally, a stable financial environment for the economy. In implementing that plan, the central banks make use of tools of monetary policy to induce changes in interest rates, and the amount of money and credit in the economy. Through these financial variables, monetary policy actions influence, albeit with considerable time lags, the levels of spending, output, employment and prices29.

In order to achieve its final objective Bank of Albania sets the operational framework of monetary policy instruments used to intervene in the money market. The instruments employed for such a purpose include: the instruments used in the open market operations, standing facilities and other liquidity providing instruments 30.

The attempts to develop this market have been focused on the formulation of laws and constructions of institutions that will participate in it. The result is: there are no shares listed in the stock market and an official stock market doesnt exit. The only securities that are trading are T-bills. In absence of stock exchange, T-bills are traded from Bank of Albania .Thus T-bills activity evaluates as indicator of competition. 31

4.1 Treasury bills as Albanias monetary policy

28 29

Tushaj, A., Cited, pg.23 Akhtar, M. A., Cited, pg.1 30 Monetary Policy, Bank of Albania 31 Tushaj, A., Cited, pg.20

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When the government wants to initiate a development project, in the condition of finding itself in budget deficit, it issues IOU-s in order to finance the project. The bond issued by the Albanian government have a maturity of one year and are represented by the Ministry of Finance, and kept in a registry form. Those are debt instruments through which the government borrows from the public.32 It is also helpful to understand the countrys condition in terms of demographic aspects, deriving from the fact that part of Albanians income come from the relatives abroad. In addition, when seeing the Albanian market operate, it can easily be noticed that three different currencies are mass used (the US Dollar, the Euro, and the Lek). Out of such statement, it is the central banks responsibility to provide assistance in managing the domestic currency and its effects on the overall economy.

4.1.1 Managing public debt

In the current days, budget revenues maintained a slower rate than expenditure due to the slower economic growth rate 33. Consequently, the additional budget expenditure was financed through the use of privatization receipts and the higher public borrowing. This policy has exerted pressure over the increase of Government debt securities interest rates of long maturity term34. It seems obvious, that so far the government is in quest of funds and it appeals to its depositors through the increase of the interest rate. The government, in order to diversify on the source of the funds required, does not only rely on the internal market. Additionally, the influence of fiscal policy on the domestic monetary markets was more moderate, since the public debt was to a large extent borrowed from the international capital markets35.

32
33

Kaiku, E.,cited, pg 22. Monetary policy Statement for the third quarter of 2009, BoA, pg.9. 34 Monetary policy Statement, cited, pg.9. 35 Monetary policy Statement, cited, pg.9

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4.1.2 Liquidity and currency management

In order to achieve the desired result of the money in circulation, the BoA implements certain policies to either tighten or loose the money in circulation. In this content, it is necessary to claim the banks role in managing the foreign currencies in the domestic market. The Bank of Albania considers that the stabilization of the banking systems liquidity and balance sheet indicators will pave the way for the lending process. In this context, the Bank of Albania has been engaged in an active role in terms of stimulating demand and supply with funds. The relaxation of monetary conditions will fuel the growth of business and consumer demand for funds, while the Bank of Albanias injection of liquidity will assist the banking system in meeting the demand for funds in quantitative terms. The Albanian banking system should understand its role rightly and transmit the relaxation of monetary policy in economy completely and rapidly. On the other hand, a lower pressure of the fiscal sector over the domestic financial markets will in the future lower the risk premium in economy, will create more room for private sector lending and will facilitate the smoothing out of the interest rate curb in favor of lowering the cost of credit further. The efficiency of the monetary policy decision will depend on the market and its participants behavior, wherein fiscal policy plays a key role 36.

It is in this extent, that the management of the monetary instruments becomes clear. BoA, through the decrease of the interest rate on the government securities, discourages investors from applying to the states auctions and as a result leaving considerate amount of liquidity in circulation. In such terms, the interest rate becomes competitive to that of the second level banks and inducing depositors to invest in the conventional deposit. By doing so, the liability side of the second level banks increases, thus providing ample funds to be lent out of credit and to raise the liquidity amount.

36

Monetary policy Statement, cited, pg.11

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When it comes to the currency management, BoA, takes under consideration the seasonal development of currencys circulation in the domestic market. In addition to the constant monitoring it does due to the fact that the domestic market makes use of other currencies as well. It happens so, partly because Albania is periodically visited by emigrants which come and increase the foreign currency, and partly because the merchants to prevent themselves from the ever changing rates of exchange, trade their merchandise in the currency they initially bought it.

It is a tendency of the domestic currency to depreciate in length between July and August in the foreign exchange domestic market 37. Out of this statement it is obvious that in this period there is and excessive demand for the domestic currency, and as a result of such liquidity, comes the depreciation of the ALL. If this fact affects other spheres of the overall economy, out of the scope predicted for such a tendency, the state provides bonds to tighten the liquidity in circulation. Moreover, this is also done in regard to the economic goal that the central bank wants to achieve for the period.

5. Government security as a mean of personal investment

The investment in government bond is done through an auction. The participants of the auctions might be banks, financial and non-financial institutions, businesses as well as foreign native individuals38. All tradable bonds are ALL indexed instruments. The main difference is that T-Bills have maturities of less than one year while T-Notes have maturities of more than one year. If you hold T-Bills and Government Bonds until maturity, payment of both principal and interest is guaranteed. Thus, it carries features listed as follows:

37
38

T-Bills and T-Notes are short and long-term government borrowing instruments. They are guaranteed by the Albanian Government. They provide fixed returns (if you invest your money till due maturity) and are liquid instruments. In a volatile market where the interest rates are going up, there is risk.

Monetary policy Statement, cited, pg.18 Kaiku, E., cited.

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Investing on securities is not like investing on time deposit. It is possible that you lose a part of your principal amount if you cannot hold securities till their due maturity. T-Bills are sold at a discount and the gain at maturity is known in advance. T-notes have coupons. Coupon-bearing T-notes are issued at fixed or floating interest rates. Coupon payments of T-Notes are done semi-annually (on every 6-months) These instruments may be bought or sold before the original due maturity at current market prices. T-Bills can be converted to cash at any time. They may be sold on the secondary market before maturity39.

5.2 Competing conventional deposits

The high risk premium on long maturity terms and the existence of a shallow financial market were the rationale behind the high Government securities long-term yields. On the other hand, the high yields attracted the individuals investment in this market, hence providing them with an alternative instrument to keep their savings and at the same time, increasing the share of budget deficit financing from this item 40.

In recent years, the Albanian banking system is characterized by a continued increased trend, both in terms of number of banks and in the expansion of banking activity. These trends are accompanied by an increase of lending activity and expansion of the range of products offered by banks, too. At the end of 2007, there were 17 second level banks on banking market 41. Additionally, there is a wide range of financial institutions competing with each other, in order to attract depositors with competing interest rates. As a result, in such small counrty as Albania, and with the previously stated experience on investment, many depositors are yet again skeptical to rely on the banking system, or non-state financial institution, in spite of the fact that it is the BoAs responsibility to monitor and to alter the key interest rate.

39

Investments, T-bills/T-notes, http://bkt.com.al/409.aspx Monetary policy Statement, cited, pg.10 41 Tushaj, A., Cited, pg.12
40

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In a nutshell, when it comes to invest in financial institutions, depositors in Albania are more prone to be attracted to the government security rather than the conventional deposits. It is commonly taken for granted that the state is default free, and as a result depositors have the security of the state that they will be paid back. This, for the fact that, as stated in the previous paragraphs, the state can simply print money to pay people back.

6. Conclusion
In conclusion, it is to be said that governments, through the recorded history, have made use of government security to finance its budget deficit, to acquire funds for future projects, and to manage the monetary policy. The governments treasury, be it: bond, bill or even note, as part of the monetary instruments, has well defined features and usage in accordance to the needs of the issuer. Nevertheless, the needs of the issuer are related to the results desired to perform in the domestic economic environment, as part of its responsibility in managing the changing factors and variables arising from economic trends, operations and forecasts. In an individual approach, the government security is seen as a risk - free deposit investment, due to the security and faith they have in the government to pay them back. Secondly, what is more appealing to them is the higher return rate in contrast to the conventional deposit. In addition, what repels depositors from investing elsewhere is the traumatic experience of the previous economic collapse, thus investing in the government security is both, highly profitable, safe, and psychologically comfortable.

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7. Picture 1. Graphical Scheme of the Pyramid

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Abbreviations page
BoA GDP T Bond T Bill IOU OMO ALL Bank of Albania; Albanias central bank Gross Domestic Product Treasury bond Treasury bill I Owe You; Government security Open Market Operation Albanian Lek

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List of reference
Akhtar, M., A., Understanding Open Market Operations, pg. 1; 7; 35., http://research.stlouisfed.org/aggreg/meeks.pdf, Accessed on: 1st of August 2010. Elbirt, C., Albania under the shadow of Pyramids, http://www.worldbank.org/html/prddr/trans/so97/albania2.htm Accessed on: 4th of August 2010. Ferguson, N., The Cash Nexus; Money and Power in the Modern Word,1700 2000, pg. 107; 108., http://www.scribd.com/doc/25189824/Ferguson-Niall-The-Cash-Nexus-Money-andPower-in-the-Modern-World-1700-2000-Basic-Books-2001, Accessed on: 3 rd of August 2010. Fuster, T., The Truth and the Surface in the Albanian economy. Shekulli, 16th July 2010, Read on: 29th of July 2010. Government Bonds, National Bank; Financial, http://info.nbf.ca/fbn/cda/theme/0,,divId-2_langId-1_navCode-10090_navCodeExTh0,00.html Accessed on: Accessed on: 3 rd of August 2010. Government bond, http://en.wikipedia.org/wiki/Government_bond, Accessed on: 2 nd of August 2010 Investments, T-bills/T-notes, Banka Kombetare Tregtare, http://bkt.com.al/409.aspx, Accessed on: 9th of August 2010. Jarvis, C., The rise and the fall of Albanias pyramid scheme, http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm Accessed on: 4th of August 2010. Kaiku, E., Treasury Bonds, Hapesire, April 16 2007,pg 22. Accessed on: 4th of August 2010. Monetary Policy for the third quarter 2009, Bank of Albania, pg: 9; 10; 11; 18., http://www.bankofalbania.org/web/periodical_reports_of_monetary_policy_262_2.php, Accessed on: 2 nd of August 2010.

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Open market operations, Federal Reserve Bank of New York, http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html Accessed on: 4th of August 2010. Treasury Bond definition, http://www.investorwords.com/5061/Treasury_Bond.html, Accessed on: 2 nd of August 2010. Tushaj, A., Market concentration in the banking sector: Evidence from Albania, pg. 5; 10; 20; 25., http://www.unibamberg.de/fileadmin/uni/fakultaeten/sowi_lehrstuehle/vwl_finanzwissenschaft/Forschung/ BERG/BERG_73_Tushaj.pdf, Accessed on: 1st of August 2010.

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Contents
1.Introduction .............................................................................................................................. 2 1.2 Historical background to public debt ............................................................................... 2 1.3 Development approach to current days............................................................................ 3 2. Operating with government security ...................................................................................... 4 2.1 Open Market Operation .................................................................................................... 4 2.2 Classification of bonds ...................................................................................................... 5 Treasury bonds ............................................................................................................................ 6 Treasury notes.............................................................................................................................. 6 CPI-indexed Treasury Notes (TIPS) ...................................................................................... 6 Treasury Bills .............................................................................................................................. 7 2.3 Practical demonstration..................................................................................................... 7 3. Albanians investments retrospective ................................................................................... 8 3.1 Bad investments ................................................................................................................ 9 3.2 How did the schemes operate? ....................................................................................... 10 4. Central Banks role ............................................................................................................... 12 4.1 Treasury bills as Albanias monetary policy ................................................................. 12
4.1.1 Managing public debt .................................................................................................. 13 4.1.2 Liquidity and currency management............................................................................. 14

5. Government security as a mean of personal investment..................................................... 15 5.2 Competing conventional deposits .................................................................................. 16 6. Conclusion ............................................................................................................................. 17 Picture 1. Graphical Scheme of the Pyramid ........................................................................... 18 Abbreviations page .................................................................................................................... 19 List of reference ......................................................................................................................... 20

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