Financial Literacy for Millennials by Andrew Smith

Author:Andrew Smith
Language: eng
Format: epub
Publisher: ABC-CLIO

TREASURY SECURITIES AND MONEY MARKET FUNDS

Sometimes people want investments to be very liquid (easily and quickly converted to cash) but don’t want investment risk. The U.S. government issues securities called Treasury notes (T-Notes) and Treasury bills (T-Bills). T-Notes have maturities from 2 to 10 years and pay interest every six months. There’s such a large market for them that they can be sold at any time and converted to cash, but their values can change as interest rates fluctuate—the shorter the maturity, the less price change in the T-Note when interest rates move. T-Bills have maturities between four weeks and one year and are sold at a discount to their maturity payoff (called face value), so all the interest is collected when the T-Bill matures. The return on discounted securities is called the yield, which is equivalent to an interest rate. For example, you’d pay $999.27 for a 6-month T-Bill priced to yield 0.145 percent per year, and collect $1,000 when it matures. The U.S. Treasury Department also sells 30-year bonds, but these bear substantial interest rate risk from their long maturities. The securities issued by the U.S. government are considered the safest investments in the world, so their interest rates are relatively low. You can buy these securities directly from the government or at most banks and brokerage firms with little or no transaction cost.

Money market funds are another type of short-term, liquid, safe investment. The term “money market” refers to large-dollar transactions between banks and big businesses, sometimes of just a few days’ duration, where companies borrow money. Because these obligations are the debts of the largest companies in the world, these short-term investments are considered safe. Banks, mutual fund companies, and brokerage firms package these securities into money market funds to sell to investors as shares where the value is always $1 per share. There are even money market funds that hold only U.S. Treasury securities, for an even safer (and lower yielding) investment. Some money market funds offer check-writing to make accessing your money easy. In a low-interest rate environment, however, the interest rates on money market funds are close to zero.

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