T-Bill

  

Categories: Bonds

See: Treasury Bill. And sing a little bit. F sharp, please. Treasury Bill sings waaaaay better than Treasury Bob, who is really just a karaoke man.

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Finance: What are Treasury Bills?15 Views

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]

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

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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

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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

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

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

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

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

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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

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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

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

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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]

Up Next

Finance: What are T-Notes, T-Bonds and TIPS?
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What are T-Notes, T-Bonds, and TIPS? T-Notes are debt securities (like bonds) that are issued by the government and mature within one to 10 years....

Find other enlightening terms in Shmoop Finance Genius Bar(f)