Bond Yield

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

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

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

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

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

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

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

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

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

zero coupon bond .meaning that an investor might pay nine hundred eighty [zero coupon bonds explained]

two dollars for a thousand dollar par bond which comes due in six months. the

investor for loaning the government her nine hundred eighty two dollars in cash

for six months gets paid eighteen dollars in rent on that money. there are

no interest payments made along the way as there would be in a traditional bond

investment which typically pays interest twice a year. in this case the investor

is just buying a grand at a discount. simple .and note that in this case the

investment return is eighteen bucks on a grand for six months. that implies an

annualized interest rate on the money ie over twelve months of what? mm-hmm we're [equation]

testing you here a little bit just seeing if you're awake. well if an

investor makes eighteen bucks in six months which is half a year if you

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

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

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

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

annualized. thirty-six bucks over a grand. that's how we got there but it's not

quite accurate why? because the investor didn't put in a full grand ,they will

have put in less. well in this example they invested nine hundred eighty two

dollars and they got back eighteen bucks for six months of doing a whole lot of [piggy bank called "U.S gov."]

nothing. watching the clock and hoping the US

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

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

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

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

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

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]