Treasury Bill - T-Bill



Treasury Bill - T-Bill

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What Does Treasury Bill - T-Bill Mean?

A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

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Investopedia explains Treasury Bill - T-Bill

For example, let's say you buy a 13-week T-bill priced at $9,800. Essentially, the U.S. government (and its nearly bulletproof credit rating) writes you an IOU for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would with a coupon bond, for example. Instead, the appreciation - and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ($10,000). In this case, the T-bill pays a 2.04% interest rate ($200/$9,800 = 2.04%) over a three-month period.

We will discuss U.S. Government and Federal Agency Instruments further in a later section.

Municipal Government Instruments

Municipalities issue tax-exempt money market securities that include the following notes:

• Construction loan notes (CLNs) A short-term obligation in the form of a note, used for the funding of construction projects such as housing developments. In most cases, the note issuers will repay the note obligation by issuing a longer term bond and using the proceeds from the bond to pay back the note.

o This type of financing is most often seen at the municipal level: for example, a large city might use a construction loan note to finance a large housing project to meet the demands of its growing population.

• Revenue anticipation notes (RANs)

o A short-term debt security issued on the premise that future revenues will be sufficient to meet repayment obligations.

o RANs are generally used to generate immediate investment capital to begin a large project. These securities are repaid with future expected revenues from the completed project, which may come from sources like turnpike tolls or stadium ticket sales.

• Bond anticipation notes (BANs)

o A short-term interest-bearing security issued in the anticipation of larger future bond issues.

o Bond anticipation notes are smaller short-term bonds issued by governments and corporations. Knowing that the proceeds of the larger future issue will cover the anticipation notes, the issuing bodies use the notes as short-term financing.

• Tax anticipation notes (TANs)

o Short-term debt securities issued in anticipation of future tax collections.

o TANs are generally issued by state and municipal governments to provide immediate funding for a capital expenditure, such as highway construction

Certificate Of Deposit - CD

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What Does Certificate Of Deposit - CD Mean?

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

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Investopedia explains Certificate Of Deposit - CD

A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. 

For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end,  the CD will have grown to $10,500 ($10,000 * 1.05).

CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.

Banker's Acceptance - BA

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What Does Banker's Acceptance - BA Mean?

A short-term credit investment created by a non-financial firm and guaranteed by a bank.

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Investopedia explains Banker's Acceptance - BA

Acceptances are traded at a discount from face value on the secondary market. Banker's acceptances are very similar to T-bills and are often used in money market funds.

Sweep Account

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What Does Sweep Account Mean?

A bank account that automatically transfers amounts that exceed (or fall short of) a certain level into a higher interest earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds.

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Investopedia explains Sweep Account

In a sweep program, a bank's computers analyze customer use of checkable deposits and "sweeps" funds into money market deposit accounts.

This is done to provide the customer with the greatest amount of interest with the minimum amount of personal intervention. That said, sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts. Now, some brokerage accounts have similar features that enable investors to gain some additional return for unused cash. 

Credit Sweep

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What Does Credit Sweep Mean?

Also known as an automated credit sweep, this term refers to an arrangement between a bank and a customer (usually a corporation) whereby all idle or excess funds in a deposit account are used to pay down short-term borrowing under a line of credit. The client usually sets a target balance which will determine how much of its funds will be used.

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Investopedia explains Credit Sweep

This is a cash management tool that is especially beneficial to large corporations that have multiple accounts and great variablity in payments from day to day. Most credit sweeps also have the opposite arrangement, whereby if the funds in the account are less than the target balance, there will be a drawdown on the line of credit to reach the target.

Repurchase Agreement - Repo

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What Does Repurchase Agreement - Repo Mean?

A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

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.

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Investopedia explains Repurchase Agreement - Repo

Repos are classified as a money-market instrument. They are usually used to raise short-term capital.

Commercial Paper

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What Does Commercial Paper Mean?

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

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Investopedia explains Commercial Paper

Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement

Money Market Fund

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What Does Money Market Fund Mean?

An investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.

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Investopedia explains Money Market Fund

A money market fund's purpose is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. Because of their relatively low returns, investors, such as those participating in employer-sponsored retirement plans, might not want to use money market funds as a long-term investment option.

Preferred Shares With Tax Advantages

Posted: Oct 01, 2009 10:33 AM by Aryeh Katz

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Filed Under: Banking,Stock Analysis,Stocks

Tickers in this Article: ABN-E, BCS-C, ED-A

Most investors leave the tax issues to the accountants - often to their detriment. To find out later that much of your return was eaten up by the IRS is unsettling, to say the least. And to make matters worse, many financial advisors are equally unaware of the tax ramifications of particular securities. What makes the process even more difficult is that not all preferreds are treated equally by the tax authorities. For example, REIT preferreds, trust preferreds and all debt-based securities, to name but a few, will not qualify for tax-advantaged status, i.e., the 15% tax rate. That leaves mainly foreign preferreds, though not exclusively.

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Below we highlight several "preferred" preferreds with the caveat that the status on these issues can change depending upon a number of variables. You are advised to consult with a suitable authority before making any investment decision.

Global Operators 

ABN Amro's 'E' series preferred share (NYSE:ABN-E) has a 5.90% coupon and currently trades for $10.12, yielding a hefty 14.58% to those interested in buying. The issue also gets a thumbs-up from ratings agencies Moody's, who gives it a B3, and Standard & Poor's, from whom it gets a straight B.

ABN Amro is a global banking giant with a market cap in excess of $92 billion and 3,500 offices scattered over 70 countries and territories. The bank is headquartered in The Netherlands and has been under pressure for an extended period over its merger with another Dutch financial concern, Fortis Bank Netherlands. The EU claims the merger creates an unfair competition situation.

Another foreign bank, Barclay's PLC, offers a tax-advantaged preferred share (NYSE:BCS-C) with a 7.75% coupon that now trades for $24 and yields a solid 8.5%. Moody's and S&P rate the shares Baa2 and BBB+ respectively.

300 Years of History 

Barclay's has a 300 year history in the banking business and currently operates in over 60 countries worldwide. This preferred issue also has an impressive history, rising over 400% in just the last half-year.

Consolidated Edison of New York has a 5.00% coupon preferred share that trades for $88.25 and yields 5.67% annually (NYSE:ED-A). The shares are up over 23% from lows set nearly a year ago and are rated Baa3 by Moody's and BBB by S&P.

ConEd is a regulated utility providing electricity and natural gas to customers in a 1,350 square mile area that covers parts of New York, New Jersey and Pennsylvania.   

The Wrap

The above three preferreds offer investors secure income and the additional advantage of qualifying for the 15% tax rate. The message is clear: don't be cavalier when choosing investments. Tax treatment should be uppermost on the minds of all income investors. (To learn more, see A Primer On Preferred Stocks.) 

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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