Quick question

[[wcip]Angel]

Treat me like an 8-year old. Can you explain what a T-bill is? I have no to little knowledge of the US economic system, and one of my students is going to prepare a presentation about the credit crisis. I tried googling "t-bills" but was unable to find an answer (I could understand) to my question.

[Nystul]

It is short for Treasury Bill, and is similar to a government bond. Essentially one who invests in t-bills is making a short term loan to the United States government. Relatively low risk, low yield, easy to get out of investment as far as I know.

[[wcip]Angel]

It is short for Treasury Bill, and is similar to a government bond. Essentially one who invests in t-bills is making a short term loan to the United States government. Relatively low risk, low yield, easy to get out of investment as far as I know.

In other words, purchasing T-bills is like buying stocks in the US government as you would in any other company?

[ZatarRufus]

Angel' date='May 15 2009, 02:57 AM' post='167217']
Can you explain what a T-bill is?

Wiki Article

[Jester]

Not quite. You don't become a part owner of the US government. If the worth of the government goes up, your worth does not go up with it.

It's a kind of loan, like a bond. You buy a "100 dollar" t-bill for, say, 98 dollars, and at the end of the year, you get to sell it back to the government for the full hundred. The higher the interest rate, the less you get to buy your "100 dollar" t-bill for at the beginning.

US treasury bills are generally considered the safest possible investments, on the idea that the US is a powerful, stable country that is highly unlikely to back out of its financial commitments. There is also very little speculation about their worth: it says right on the bill what you're going to get for it, so there's very little market in guessing their value.

-Jester

[Occhidiangela]

It's a kind of loan, like a bond.

This bears repeating: not a sort of stock, a sort of bond. Do not buy stock in the USG, it operates in the red every year. No dividends, not even a peace dividend.;)

US treasury bills are generally considered the safest possible investments, on the idea that the US is a powerful, stable country that is highly unlikely to back out of its financial commitments. There is also very little speculation about their worth: it says right on the bill what you're going to get for it, so there's very little market in guessing their value.

Their resale value rises and falls, in the secondary market, as interest rates go up and down compared to the rate at which the bills are or were purchased.

Occhi

[naverone]

A Treasury Bill is a US government security with a maturity of less than one year. As others have mentioned it is sold on a discounted basis from its face value (also known as par value).

Treasury Bills differ from other US Government debt instruments in that:
1) Their maturity is shorter
2) They don't make coupon payments

As with any bond, note that there is an inverse relationship between price and yield. Also mentioned was the fact that prices can vary as market rates move; while correct this is only pertinent if you plan on reselling the T-bill before maturity.

Cheers,
Naverone

[[wcip]Angel]

A Treasury Bill is a US government security with a maturity of less than one year.

= "If you plan to sell your T-bill, you need to wait at least a year after having purchased it, or there won't be a noticeable profit" ?

As others have mentioned it is sold on a discounted basis from its face value (also known as par value).

They are sold for less than their actual value?

Treasury Bills differ from other US Government debt instruments in that:
1) Their maturity is shorter
2) They don't make coupon payments

= 1) Other forms of lending money to the government for profit takes even longer to yield any profit?
= 2) What is a coupon payment?

As with any bond, note that there is an inverse relationship between price and yield.

Would you mind explaining this?

Thanks!

[Jester]

Angel' date='May 19 2009, 01:58 PM' post='167391']
They are sold for less than their actual value?

Sort of.

The government wants my money today. I'm looking to invest for tomorrow. So, I give them 95 dollars, and they give me a note that says "On this date (a year from now) we promise to give you 100 dollars".

They get the money in the present, I get more money in the future.

-Jester

[--Pete]

Hi,

I'm not an expert, but I'll give it a shot. You can get a lot of information from the Wiki article on them.

= "If you plan to sell your T-bill, you need to wait at least a year after having purchased it, or there won't be a noticeable profit" ?

I don't think so. Since T-bills reach maturity in under a year, and do not continue to accrue interest after maturity (I think), then there would be no reason to buy a mature T-bill. The market for T-bills would be the time between their issue date and their maturity date.

They are sold for less than their actual value?

Their face value (what you're thinking of as 'actual') is the value they will have when they reach maturity. That value includes the purchase price plus the accumulated interest. So, their sale value is the face value minus the interest.

= 1) Other forms of lending money to the government for profit takes even longer to yield any profit?

Sort of. T-bills have the shortest period between their sale and their maturation date. Other government bonds have longer periods. However, you can typically sell any of those bonds at any time. Their value fluctuates in accordance with the economy.

--Pete

[naverone]

Pete's explanations are right on, but I can't resist piling on...

They are sold for less than their actual value?

T-bills are sold at a discount to face value. Face value is what the T-bill will be worth at maturity.

ex. You buy a T-bill that matures in 6 months for $99.50
-> Six months later the T-bill is worth $100

[quote name]
= "If you plan to sell your T-bill, you need to wait at least a year after having purchased it, or there won't be a noticeable profit" ? [/quote]
T-bills are traded every day, you can sell or trade them at every day up to maturity. However, if you buy a T-bill and then choose to sell it before it matures you are subject to interest rate risk and might sell at a loss.

ex. You buy a T-bill that matures in 6 months for 99.50. The interest rate enviroment goes up (investors are demanding more return for their money) and now a 6 month T-bill trades at $99.25.

If you hold to maturity -> six months later the T-bill is worth $100
If you trade -> you sell the T-bill on the market for $99.25 and loss $0.25

Notice how this risk is only apparent if you plan on trading your T-bills (you probably won't). Also, the market rates could've gone down and then you could've traded for a profit.

= 1) Other forms of lending money to the government for profit takes even longer to yield any profit?

Other forms of debt take longer to mature but typically offer a higher yield.

[quote = 2) What is a coupon payment?
Would you mind explaining this? [/quote]

T-bills are known as zero-coupon bonds. Bonds with coupons work as follows.

Ex. A $100 face value bond that pays a 5%coupon annually
-> Once a year this bond will make a $5 (100*.05) payment to the investor until maturity.

And now to explain the inverse relationship between price and yield:

Assume in the above example that the current rate demanded by the market on this type of bond is 5%. The bond will sell at face value, ie the $100 face value bond will trade at $100.

-> Assume the market rate changes to 4.5%. The 5% coupon is now above the rate of return required by the market. The price of the bond will increase from 100 until the yield is 4.5%, or the bond will trade at ~$111.

-> Assume the market rate chages to 5.5%. The coupon is now below the rate of return required by the market. The price of the bond will go down until it yields 5.5%, and the bond will trade at ~$91.

Note that if rates that up or down, the bond will stay pay face value at maturity and the same coupon payment throughout.

It's been a long day- apologies in advance for any mental errors :whistling:
Cheers,
Naverone