The difference between bonds, notes and bills

Summary

In this video, Patty Harsh explains the different types of U.S. government debt—Treasury bills, notes, and bonds—each with distinct maturities and interest rates. Treasury bills are short-term securities sold at a discount, while notes and bonds are longer-term and pay fixed interest. The government raises funds by selling these securities to investors, ranging from individuals to large institutions. The primary appeal of Treasury securities is their safety and liquidity, though some investors worry about the potential for economic collapse. Overall, these securities serve as a stable investment option in uncertain times.

Takeaways

• 😀 Treasury securities come in three main types: Treasury bills, notes, and bonds.
• 😀 The primary difference between these securities is their **maturity** period: bills are less than 1 year, notes are between 1 and 10 years, and bonds are more than 10 years.
• 😀 Treasury bonds have long-term maturities (e.g., 30 years) and offer a fixed interest rate (e.g., 2%).
• 😀 Treasury notes are medium-term securities (e.g., 7 years) and offer a fixed interest rate (e.g., 3.5%).
• 😀 Treasury bills are short-term securities (e.g., 6 months) and are sold at a **discount** rather than paying interest.
• 😀 Investors buy Treasury bills at a discount (e.g., 98% of face value) and receive the full face value upon maturity, making a profit.
• 😀 The U.S. government raises money by issuing these securities and sells them through a network of banks.
• 😀 Buyers of Treasury securities include governments, institutions, and individual investors who see them as **safe** and liquid.
• 😀 Treasury securities are **highly liquid**, meaning investors can easily trade or sell them and get their money back quickly.
• 😀 One reason people invest in Treasury securities is because they are considered **safe** compared to other market risks, like stocks.
• 😀 Despite being considered safe, there's an inherent risk of the U.S. economy collapsing, leaving investors with worthless securities in extreme cases.

Q & A

What are the primary types of government debt issued by the U.S. government?

The primary types of government debt issued by the U.S. government are Treasury Bonds, Treasury Notes, and Treasury Bills. These are different types of securities used to raise money for the government.

What is the main difference between Treasury Bonds, Treasury Notes, and Treasury Bills?

The main difference lies in their maturity or tenor. Treasury Bonds have a maturity of over 10 years, Treasury Notes have a maturity between 1 and 10 years, and Treasury Bills have a maturity of less than 1 year.

How are Treasury Bills sold to investors?

Treasury Bills are sold at a discount. For example, if the face value of a bill is $100 million, it might be sold for $98 million. When it matures, the investor receives the full $100 million, earning a profit based on the discount.

How does the U.S. government raise money through these securities?

The U.S. government raises money by issuing these securities and selling them to investors through a network of banks. These banks help market the bonds, notes, and bills to various investors, including institutions and individuals.

What is the interest rate difference between Treasury Bills, Notes, and Bonds?

Treasury Bonds and Treasury Notes have fixed interest rates, while Treasury Bills do not pay a fixed interest rate. Instead, they are sold at a discount, and the profit from the discount acts as the return or interest for the investor.

What types of investors typically buy Treasury Bonds, Notes, and Bills?

Investors that buy these securities range from governments (like the Japanese government) to institutional investors (such as pension funds) and even individual investors who are looking for a safe and liquid investment.

Why might an investor choose to buy Treasury Bonds, Notes, or Bills instead of other types of investments?

Investors may choose to buy these securities for their safety, liquidity, and predictable returns. Treasury securities are considered low-risk because they are backed by the U.S. government. They are also easy to buy and sell in the market.

What does the liquidity of Treasury securities mean for investors?

Liquidity means that Treasury securities can be easily bought and sold in the market, allowing investors to quickly access their money. This is particularly important for large institutional investors like pension funds.

What risks are associated with investing in U.S. government securities, despite their perceived safety?

The main risk is that, while Treasury securities are considered safe, there is still uncertainty. If the U.S. economy were to collapse, long-term Treasury securities could become worthless, leaving investors holding valueless paper.

How does the U.S. government ensure that there is a market for Treasury securities?

The U.S. government ensures there is a market for Treasury securities by making them highly liquid. A large number of investors—both institutional and individual—purchase them, and they are constantly traded in the market due to the general belief in the security of U.S. government debt.