C.
Treasury Bills (T-Bills)
: Treasury bills are short-term loans issued by the United States Department of the Treasury. They are discount securities, i.e. they are issued at a discount from their face value. For example, you might pay $970 for a $1,000 bill. When the bill matures, you would be paid its face value, $1,000. These bills do not pay a coupon. The yield is the accrual of the amount from the purchase price to bill's face value, in this example, $30. The interest is determined by the discount rate, which is set when the bill is auctioned. As the Treasury is the largest single debt issuer in the world, the Treasury market is at once the most active and liquid. Issuance in this market is on an auction basis with the submission of both competitive (based upon yield) and non-competitive tenders (based upon quantity) allowed. These bonds trade in the over-the-counter secondary market. U.S. government securities dealers offer continuous bid (the price at which the dealer is willing to buy) and ask (the price at which the dealer is willing to sell) prices on outstanding securities. Evidence of ownership is book-entry form at the Federal Reserve Bank. Investors receive a receipt as evidence of ownership. Interest income is exempt from local and state income tax, but subject to federal income tax. The United States Treasury issues bills in 13 week, 26 week and 52 week terms. The minimum denomination is $1,000. Treasury bills are default risk-free. Their rates are often the basis for the risk-free rate of return. Such bills are subject to inflation risk. Interest on these bills is taxable only when they either mature or are sold. Bills are issued in electronic form and may be sold before maturity.

D.

Commercial Paper: Commercial paper consists of short-term, promissory notes issued primarily by financial and nonfinancial companies. Maturities range up to 270 days but average about 30 to 50 days. Many companies use commercial paper to raise cash needed for current transactions and many find it to be a lower-cost alternative to bank loans. They also do so to avoid the necessary registration process for publicly traded debt securities with maturity dates in excess of 270 days. Consistent with shorter term rates, the yield on commercial paper is a bit higher nonetheless due to the slightly greater risk of default. Like treasury bills, commercial paper is sold at a discount, with the yield coming in the form of accrual to par. The yield is commensurate with that of other money market securities, but a bit higher due to credit, liquidity and tax risks. The paper is subject to the issuer's ability to pay, trades less frequently and interest is not exempt from state and local income taxes. Institutional investors such as money market mutual funds invest in commercial paper.

E. Banker's Acceptances: a form of acceptance financing to finance commercial transactions, it is a negotiable order to pay a specified amount of money on a future date, drawn on and guaranteed or "accepted" by a bank. These drafts are usually drawn for international trade finance purposes as an order to pay an exporter a stated sum on a specific future date for goods received. The act of a bank stamping the word "accepted" on the draft creates a banker's acceptance. These types of instruments are subject both to inflation risk, credit risk and counterparty risk (i.e. the accepting bank failing to pay the exporter). As with commercial paper and treasury bills, these instruments are sold on a discounted basis. The investors are institutional, such as money market mutual funds.

F. Eurodollars: U.S. dollar denominated deposits taken by foreign banks and foreign branches of U.S. banks. These are loans to credit-worthy foreign companies.



Individual bonds

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