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Finance: What are Treasury Bills? 15 Views


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What are Treasury Bills? Like other debt finance platforms, the US government issues its debt in several ways, and has different terms for each. Treasury Bills are zero coupon US government debt instruments that have a monthly, quarterly, 6 month and 1 year maturities. They are sold at a discount to face value par, so the difference between their discount and the full value is the commensurate interest.

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English Language

Transcript

00:00

finance a la shmoop. what are Treasury bills? well the US government is a

00:07

financial pig. it borrows money all the time [pig crosses screen]

00:11

snort snort. well somebody's gotta buy vibrating back massagers for all those

00:15

senators. tea bills are just one way in which the government raises cash for

00:20

itself to you know buy things. the deal works like this.

00:23

investors write a check to the US government taking their hard-earned cash

00:28

and giving it to Uncle Sam who in return gives them a piece of paper promising to

00:34

pay them back in a short ish period of time .while tea bills are like that

00:38

they're typically short in duration and they sell at a discount to par like a

00:43

zero coupon bond .meaning that an investor might pay nine hundred eighty [zero coupon bonds explained]

00:49

two dollars for a thousand dollar par bond which comes due in six months. the

00:54

investor for loaning the government her nine hundred eighty two dollars in cash

00:58

for six months gets paid eighteen dollars in rent on that money. there are

01:03

no interest payments made along the way as there would be in a traditional bond

01:07

investment which typically pays interest twice a year. in this case the investor

01:12

is just buying a grand at a discount. simple .and note that in this case the

01:16

investment return is eighteen bucks on a grand for six months. that implies an

01:21

annualized interest rate on the money ie over twelve months of what? mm-hmm we're [equation]

01:29

testing you here a little bit just seeing if you're awake. well if an

01:32

investor makes eighteen bucks in six months which is half a year if you

01:35

doubled the six months to be twelve months or a full year well you could

01:39

also double the eighteen bucks to be thirty-six bucks and yeah that's it.

01:43

notionally had the government rented that grand for a year it would have paid

01:48

thirty-six dollars for the privilege or three point six percent interest

01:52

annualized. thirty-six bucks over a grand. that's how we got there but it's not

01:58

quite accurate why? because the investor didn't put in a full grand ,they will

02:02

have put in less. well in this example they invested nine hundred eighty two

02:07

dollars and they got back eighteen bucks for six months of doing a whole lot of [piggy bank called "U.S gov."]

02:12

nothing. watching the clock and hoping the US

02:14

government wouldn't go bankrupt during that time period. so the interest rate of

02:18

return to the investor? well you take 18 bucks and divide it by 982 and you get

02:24

about 1.8 3% annualize it and you get a skosh more than 3.6 percent ie something

02:31

more like three point six six percent or so .small change but on big numbers that

02:36

adds up and now with investor money the government is free to do all its pork

02:40

spending. maybe a nice new sty for the Speaker of the House. what do you think? [pig walks on back legs through a store carrying a basket]

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