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Untitled2_33 - Chapter 2 Introduction to financial systems...

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Government notes and bonds are issued in the USA by the US Treasury to finance national debt. Notes have an original maturity of one to ten years, while bonds have an original maturity of ten to twenty years. Government notes and bonds are free of default risk (risk that the issuer of the bond will default, that is, be unable to make interest payments and principal repayment, as discussed in Chapter 6). In fact, the issuer (the government) can always print money to pay off the debt if necessary. As a consequence, they pay lower interest rates than corporate bonds. Such bonds are known as gilts in the UK, Treasuries in the USA and Bunds in Germany. Note that among government debt instruments there are Treasury bills. They are money market securities, with an original maturity of less than one year. They do not pay any interest, but they are issued at a discount from their par value and they are repaid at the par value at the maturity date. The difference between the issue value and the par value represents
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