ShmoopTube

00:00

Finance allah shmoop what are t notes t bills and

00:06

tips All right we'll see that tea in there Well

00:09

it stands for treasury and all of these air one

00:12

flavor or another of government debt that is the u

00:16

s government raises cash for itself teo fix roads build

00:19

bridges and erect statues of lebron james dunking on the

00:23

statue of liberty or you know whatever else he thinks

00:26

the public wants or needs it does that by auctioning

00:29

off these debt securities with the promise of its full

00:31

faith and credit to pay back the money is the

00:34

paper specifies well t notes are quote mid range unquote

00:37

paper in that they generally have maturity ease of two

00:40

three five seven and ten years that's a teen note

00:43

t notes carry a stated interest rate and look a

00:45

lot like a normal corporate bond paying interest twice a

00:48

year T bills on the other hand are generally very

00:52

short term paper usually coming due within a few days

00:55

all the way up to a year they're sold or

00:57

auctioned at a discount meaning that the t bill might

01:00

promise to pay a thousand bucks if it comes due

01:03

In six weeks you might pay nine hundred ninety six

01:06

dollars for it and you get a whopping fee Four

01:08

bucks an interest for your six weeks hard work of

01:11

owning that t bill and just you know sitting there

01:14

kind of looks like a zero coupon bond Okay so

01:16

now we have tips that's tips treasury inflation protected securities

01:21

tips as in show us your tips getting Why do

01:24

we have such a thing Well the problem with super

01:27

duper safe bonds like those of the u s government

01:30

is that investors holding them a long time often do

01:33

worse after taxes than inflation meaning that if inflation is

01:37

growing at three percent a year in their bonds are

01:40

only returning one percent a year after tax while then

01:43

the investors actually losing two percent a year in buying

01:46

power and that's a problem in nineteen nineties when investors

01:49

started to realize this issue well they began Tio you

01:52

know stop buying u s government bonds and that's a

01:55

huge problem for a country that desperately needs to borrow

01:58

cash all the time So rather than risk a liquid

02:01

marketplace where there's just no buyers buying government paper uncle

02:05

Sam created tips which basically adjust the end value of

02:09

the principle that investors get based on the c p

02:13

i or consumer price index which is a measure of

02:16

the average selling prices of a carton of milk a

02:19

gallon of fuel a dozen eggs and a grand slam

02:21

breakfast at denny's Basically what happens is that the price

02:24

of the principal the investor gets back goes up with

02:27

inflation over time So they're not losing buying power and

02:31

that's a big deal That's it go Enjoy your grand 00:02:33.995 --> [endTime] slam It'll be fourteen thousand dollars in fifty years

Full Transcript