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United States. T-bills are non-interest-bearing short-term
obligations with a maturity of 1 year or less. They are sold at
less than face value; the discount reflects the fact that a period
of time must elapse before the bill reaches maturity and the
obligation is payable at face value. T-bonds are interest-bearing
long-term obligations generally having maturities in excess of 10
years. T-bills and T-bonds are actively traded; their market
values depend upon changes in interest rates. As a rule, the
market value of a given T-bill or T-bond will decline if interest
rates rise, and its value will increase if interest rates fall.
Merit's markets did not deal directly with T-bills and T-
bonds. Rather, Merit dealt only with options. The two types of
options that Merit sold were "puts" and "calls". A put option
consists of a contract giving the holder the right to sell T-bills
or T-bonds on a specific future date at a specific price. A call
option is a contract which gives the holder the right to purchase
T-bonds or T-bills on a specific future date at a specific price.
The price of an option is referred to as a premium. The price at
which the parties to an option agree that the underlying commodity
would be sold is called the "strike" price. An investor who
purchases or sells such a contract is said to have established a
"position".
When an investor holds a contract or a series of identical
contracts, he is said to have an "open position". Merit's
investors did not establish open positions. Rather, Merit's
options were sold only in the form of "spreads". A spread is a
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