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“My name is patty hirsch. I m. A senior editor at marketplace. Today.
I want want to talk about government debt. A lot of people have been asking questions about government debt is issued because the government s been obviously borrowing a lot of money from the marketplace using treasury bills treasury bonds treasury notes people are kind of confused about air the difference is between these things so i ll see if we can spell it out real quick. So here we go bonds got notes and we got bills. Okay and these are all types of security that are issued by good old.
Uncle sam here he is this is appeared as a big smile on his face and uncle sam is going i and he needs money okay so he needs thirty billion dollars. Okay so he s going to use all three of these types of securities to get it so what does he do he issues ten billion dollars in 30 year bonds that are priced at say. It s a two percent. Okay ten billion dollars in seven year notes that are priced at say and three and a half percent and ten billion dollars in six month bills.
Okay so you can already see the chief difference here in between bonds notes and bills and they are to do with tenor. Okay the maturity of the of the paper that s being issued at the security rule of thumb is if it s more than ten years okay ten years plus you know what s going to be a bond. It s thirty years twenty years it s going to be a but school it s going to be called a bond if it s between one and ten years okay that piece of debt is going to be called a note and if it s less than one year. It s less than one year.
It s going to be called a bill okay so that s really the essential difference between these three is that is the tenor of course..
There is one of the difference that we can see here. Which is the interest rate. Okay in the case of the bones in the notes you have a fixed interest. Which it s like a regular bond in the case of bills.
You don t have that now whenever. The government actually goes out and it raises this money what it does it we hear about it selling securities or selling treasury bonds. What is essentially doing is it s bar money from the market and the way it does that is it goes to a network of banks that it has and it says guys i need you to help me raise this money can you go out. And you can you sell these bonds notes and bills to investors of various kinds whether they be governments or institutions or individuals get me that money.
And you know i ll be paying. Then the interest rate. I ll obviously pay a bit of fee on the way ok with the bill does it work slightly differently. Say i want to buy a hundred million dollars of this issue of bills.
What i do is i go to mud to go on of these banks. And he and he gives me this piece of paper. It says for a hundred million dollars. It s a bill to be paid back in six months time ok.
It s 100 million dollars..
But instead of selling it to me at its base value of 100 million dollars. What it does is is it sells it to me it at at a discount and depending on how big the discount is that s how much money i make so say it sells at a discount of 98 cents on the dollar on 98 percent. So at 98 percent. I pay 98 million dollars.
Okay that s my money that i pay to uncle sam s okay six months later. I return this bill to uncle sam and in return. Uncle. Sam gives me 100 million dollars.
So i ve made a very tasty. Two million dollars on the side there so that s my net is two million dollars. That s how much money i make and that s kind of where the interest rate comes in that s the the outside of investing in these bills. Okay so who s buying these bonds notes and bill s well as i said.
It s all sorts of people everybody from you know the japanese government right down to you know what me. And i can buy at treasury bonds. If i want to and why would i want to well there are a number of reasons. The first reason is because i think it s safe okay say i m an investor and i look at the market and i m looking at the market now and i think things are a little bit dodgy.
I think of myself i don t want to invest in the market right seems too dangerous..
But rather than sitting on the cash. Which isn t going to wear me any money at all or putting. It a bank. Which is going around me a fraction of money maybe i should invest in one of these securities then i maybe get 2 a year.
So it s a little bit of money a little bit of a hedge against inflation. There. But you know it means that means my money is essentially safe where i believe that my money is safe the second reason is it s it s very very liquid. So if i m a big pension fund and i say have invested a hundred million dollars.
I ve got 100 million dollars to invest i want to put it somewhere that it s going to be earning money. But they can get it back really really quickly i could do that with the money market account. I could do that with a bank. But i could also do it with the treasury bond because the treasury securities are extremely liquid.
There s a big market in them all the time because everybody s buying them because everybody believes that the us. Government is secure and a lot of people are interested in holding the stuff. So it s really easy to trade in and out of so if i ve got my note for a hundred million dollars. I can sell it into the market and get my hundred million dollars back really really quickly so that s the advantage of doing that but of course.
A couple of words..
I ve been using to cut a lot of language. I ve been using m ellis traits. The difficulty here because it s kind of a that s just hedging that i ve been doing because i ve been saying almost pretty much almost certainly. We re almost certain that the us economy is going to be safe over a 30 year period.
We re almost certain that the the the market in this sue. These securities is so liquid. I m going to be able to get my money back really really quickly is that almost is the thing that worries some people and those are the kind of people that invest in you know solid commodities like gold because they think that they worry that the entire economy could collapse and they d be left. You know holding nothing but bits of worthless paper.
Okay. So is that that almost is the thing because obviously if you re holding a hundred million dollars. And in 30 year government debt. And then the us economy goes a bit does collapse in 20 years.
Well. It s going to leave you holding a valueless piece of paper and frankly. ” ..
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