Average Effective Maturity

Finance allah shmoop what are t notes t bills and

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

it stands for treasury and all of these air one

flavor or another of government debt that is the u

s government raises cash for itself teo fix roads build

bridges and erect statues of lebron james dunking on the

statue of liberty or you know whatever else he thinks

the public wants or needs it does that by auctioning

off these debt securities with the promise of its full

faith and credit to pay back the money is the

paper specifies well t notes are quote mid range unquote

paper in that they generally have maturity ease of two

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

t notes carry a stated interest rate and look a

lot like a normal corporate bond paying interest twice a

year T bills on the other hand are generally very

short term paper usually coming due within a few days

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

auctioned at a discount meaning that the t bill might

promise to pay a thousand bucks if it comes due

In six weeks you might pay nine hundred ninety six

dollars for it and you get a whopping fee Four

bucks an interest for your six weeks hard work of

owning that t bill and just you know sitting there

kind of looks like a zero coupon bond Okay so

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

tips as in show us your tips getting Why do

we have such a thing Well the problem with super

duper safe bonds like those of the u s government

is that investors holding them a long time often do

worse after taxes than inflation meaning that if inflation is

growing at three percent a year in their bonds are

only returning one percent a year after tax while then

the investors actually losing two percent a year in buying

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

started to realize this issue well they began Tio you

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

huge problem for a country that desperately needs to borrow

cash all the time So rather than risk a liquid

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

Sam created tips which basically adjust the end value of

the principle that investors get based on the c p

i or consumer price index which is a measure of

the average selling prices of a carton of milk a

gallon of fuel a dozen eggs and a grand slam

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

of the principal the investor gets back goes up with

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

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