Question

Explain the differences among government securities: government bond, treasury bill, repo.

Answer 1

Here the difference bteween the government securities are as detailed below . Both three Government securities are short termed and can be defined as

Government Bond:-A government bond is a type of debt-based investment, where you loan money to a government in return for an agreed rate of interest. Governments use them to raise funds that can be spent on new projects or infrastructure, and investors can use them to get a set return paid at regular intervals.

Treasury Bills:-

Treasury bills or T-bills are short-term securities. This means they come with shorter maturity dates than bonds and notes. T-bills are often sold in terms ranging from a few days to 52 weeks.

These government securities have a face value, such as $1,000, $5,000 or $10,000. You can usually buy them for a reduced rate. The amount you pay is the discount rate. Once the T-bill matures, the government pays the entire amount of the bill.

Another form of the treasury bill is the cash management bill. This type of treasury bill is usually issued with a variety of terms. These terms only last a few days. The cash flow from this type of government security is often used to pay for shortfalls or emergency government funding.

Repo:-

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.

For the party selling the security and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.