Question

Which one of the following is the largest market in the world for new debt securities with maturities of one year or less? commercial paper, U.S. Treasury bill, banker's acceptance, Eurodollar money market ,certificates of deposit

Answer 1

Treasury Bills:

Treasury Bills (T-Bills) are short term notes issued by the treasury department of US Government with a maturity of less than 1 year and are sold in denominations of $1000 up to maximum purchase of $5 million on non competitive bids. T-Bills are considered the world's safest debt as they are backed by the full faith and credit of the Unites States Government.

T-Bills are issued at maturities that range from 1 month to 1 year. They are sold at discount, i.e the government sells them for less than par value (Face Value) and when they mature, buys them back at par value.

In short, the interest you receive is the difference between the purchase price and what you get at the maturity. In other words, if you pay $9,700 for a T-Bill with Face value of $10,000 and keep it until maturity, you will earn $300 in interest  

T-Bills are very popular as they are one of the most affordable money market instruments and are considered as the safest investments in financial markets because government back them.

How to purchase T-Bills: - There are 3 methods of purchasing T-Bills

1) Non Competitive Bid Auctions: It allows investor to submit a bid to purchase a set dollar amount of the bills at the next auction.The yield they receive is based upon the average auction price from all bidders.This is a good method for individual investors and can be done via Treasury Direct site. The maximum amount that can be purchased through a non - competitive bid is $5 Million.

2) Competitive Bid Auctions: These are meant for those who only want to bu the T-Bills at a specific or desired yield. These bids must be made via ban or broker. A Buyer can purchase up to 35% of the amount of the initial offering for the bills being auctioned.

3) Secondary Market: Investors can also buy them on the secondary market or via mutual funds and ETFs. In order to buy or sell T-Bills in the secondary market you need to have a broker as a middle man. T-Bills are very liquid and short term, but the price will fluctuate based on movements in rate on newly issued T-Bills.