ShmoopTube

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finance a la shmoop. what are Treasury bills? well the US government is a

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financial pig. it borrows money all the time [pig crosses screen]

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snort snort. well somebody's gotta buy vibrating back massagers for all those

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senators. tea bills are just one way in which the government raises cash for

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itself to you know buy things. the deal works like this.

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investors write a check to the US government taking their hard-earned cash

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and giving it to Uncle Sam who in return gives them a piece of paper promising to

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pay them back in a short ish period of time .while tea bills are like that

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they're typically short in duration and they sell at a discount to par like a

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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

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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

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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

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doubled the six months to be twelve months or a full year well you could

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also double the eighteen bucks to be thirty-six bucks and yeah that's it.

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notionally had the government rented that grand for a year it would have paid

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thirty-six dollars for the privilege or three point six percent interest

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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

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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

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government wouldn't go bankrupt during that time period. so the interest rate of

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return to the investor? well you take 18 bucks and divide it by 982 and you get

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about 1.8 3% annualize it and you get a skosh more than 3.6 percent ie something

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more like three point six six percent or so .small change but on big numbers that

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adds up and now with investor money the government is free to do all its pork

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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]

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