What are treasury bonds? and why buy treasury bills?
Treasury bonds are securities issued by the state to finance its debts, so it is a short-term government bond. There are several types of values, some of which are reserved for institutional investors and others for the general public. Treasury bonds are bonds that you can buy for investment. Bids All investors propose an amount and a price at which they are willing to fund the state.
What are treasury bonds?
Treasury bonds are marketable securities that allow the state to raise funds from private and professional investors.
Thus, treasury bonds are part of government debt. You can invest your money by buying treasury bonds available to individuals and then lend to the state in return, the state pays interest to you every year and reimburses you for the amount you lent at the end of the investment.
Treasury bills at a fixed rate and low interest
These are securities tradable securities in the stock market securities (issued by a joint stock company), debt securities (eg bonds), and unit or share of collective investment undertakings.
It is also called a security or short-term financial instrument, issued for a period of less than one year.
Treasury bills with fixed rate and annual interest These are securities that are issued for a period of between 2 and 5 years.
Since 2013, France Tresor no longer releases new BTANs. The last BTAN expired on July 25, 2017.
Equivalent treasury bonds
These are securities that have been issued for more than two years.
Only some Treasury bills are available for purchase by individuals.
You can buy OATs listed by NYSE Euronext Paris, which is the regulated market: the market for financial instruments (stocks, bonds) managed by the market company in accordance with the operating rules (regulation, ethics and transparency) controlled by France in the Financial Markets Authority (AMF) of the Stock Exchange.
On the other hand, BTFs are not intended for individuals In addition, most life, health, and life insurance policies include a portion of their assets in OATs and BTFs.
To purchase an OAT, you must submit a stock market order: an order sent by the customer to his or her financial intermediary (generally his bank) to buy or sell securities (stocks, bonds, etc.) from your financial intermediary, at an agency or online (as with stock purchase).
OATs are issued with a face value of €1 and then, depending on the market, the price of the OAT fluctuates. The price of OATs is constantly changing depending on market conditions.
Fixed rate OATs give their owner the right to receive an interest payment (called a coupon) once a year, for the duration of the guarantee, that is, until it is repaid. This annual coupon never varies, regardless of market conditions.
OATs are redeemed in one payment upon maturity.
It is redeemed at par, i.e. at its face value of 1 euro per security.
The interest that the state pays for OTAs is subject to income tax and Social Security contributions. The same goes for the gains you make if you resell your OATs.
Why buy treasury bills?
By purchasing treasury bills, a person lends money to the state and becomes, in a way, a creditor to it that is 100% secured by the government that issues it, and it is one of the safest investments in the market however, its performance is not very high.
Treasuries are debt securities issued by provincial and federal governments. These products are safe, easy to understand, and offered at relatively reasonable rates, which is why they are so popular among investors.
Generally, treasury bills are issued in increments of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000, and $1,000,000.
So the minimum purchase is $1,000. However, some financial institutions and brokers require a purchase of at least several thousand dollars.
Treasury bonds are generally purchased in the short term, i.e. over a period ranging from one month to one year.
This type of investment falls under the category of bond bonds and is part of what is known as the money market that allows the state’s treasury bonds to obtain short and medium-term liquidity.
How do they work?
In Canada and Quebec, treasury bills are issued and auctioned off at auction and in some cases, they are sold twice a week.
An investor who buys Treasury bonds does not earn interest on his investment, as is the case, for example, with a guaranteed investment certificate (GIC).
Instead, he gets a return. This return is based on the difference between the issue price (and therefore the price paid) and the resale (or redemption) price.
In jargon, bonds are said to be “sold at a discount”, i.e. below their value, and then “redeemed at par” or redeemed at their face value.
For example, a bond with a value of $1,000 will be sold to the investor for $900 which the latter will resell at its full value (i.e. $1,000) on the specified maturity date, i.e. at the time of payment by the issuing government and therefore the yield on the bond will be $100.
What are the returns?
In the investment world, as everyone knows, the higher the risk, the higher the return because they are 100% guaranteed, T-bills generally do not offer a high return.
This return is also less generous than that offered by, among other things, some certificates of deposit and some money market funds.
Finally, an investor who sells his treasury bills before the maturity date will not be able to get the full return he was due.
It is also important to note that the yield earned on treasury bills is a capital gain so, from a tax standpoint, it is interest income and therefore this income is 100% taxable and must be accounted for on your income tax return.
Features of Treasury Bonds
Treasury bonds have advantages, but they also have disadvantages. Discussing this with your financial advisor or financial institution is the best approach before investing in this type of product.
Inflation can have a direct impact on the prices of T-bills because they become less attractive if the inflation rate is higher than the yield of T-bills In fact, in this case, the real yield of the bond becomes negative.
But inflation also has an indirect effect on government debt rates. One of the ECB’s priority roles is to keep the inflation rate at around 2% per year.
And if inflation rises too much, he will raise his policy rate to lower it and the bond rate will then rise through rebound.