chapter 15 note - Chapter 15 Government Securities By Dr M...

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1 Chapter 15 Government Securities By Dr. M. Metghalchi INTRODUCTION The U.S. federal government is the largest borrower in the world, with just surpassing $14 trillion in public debt in Summer of 2011. Divide that by 300 million of the U.S. population and we get more than $45,000 debt per person. Who manage this huge amount of debt? For more information on national debt go to: What is the National Debt? From: “The national debt is the total amount of money owed by the US Federal Government to creditors who hold US Debt instruments (like Treasury Bills and Savings Bonds). It includes all federal debt held by states, corporations, individuals and *this is the kicker* foreign governments . Yes, you heard right. We borrow money from other countries’ governments to finance our own . Which really means that we’re borrowing from their citizens to pay for programs for our citizens. It’s a head scratcher I know. By the way, that doesn’t even include the amounts we’ve promised to pay out for Medicaid, Social Security , and Medicare.” The National Debt is also known as the public debt or the government debt.” VARIETY OF FEDERAL GOVERNMENT DEBT: The U.S Treasury manages this debt, it finance these debts through marketable and nonmarketable securities. Marketable securities, by far the larger of the two, include Treasury bills (Less than one year maturity), Treasury notes (1 to 10 years), and Treasury bonds (10 to 30 years), and inflation protected bonds . Nonmarketable securities include U.S. Savings Bonds , Government Account Series , and State and Local Government Series . Treasury security ownership is registered with the U.S Treasury, and marketable security ownership can be transferred when the securities are sold. Nonmarketable securities do not allow transfer of registered ownership.
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2 The federal government has the constitutional right to tax and to create money. Thus, there is no question of the ability of the federal government to pay interest and retire the principal (at least in monetary, if not real, terms). Treasury bills are short-term federal government debt. Bills are issued in minimum denominations of $10,000 and are auctioned off at a discount, which establishes their yield. Series EE bonds are also sold at a discount, but the units are very small (e.g., $50 for $100 face amount of debt). These bonds are designed to tap the funds of small savers, while treasury bills are designed to tap the temporary idle funds of banks, other financial institutions, corporations, and state and local governments. The prices of all debt instruments are sensitive to changes in interest rates. When interest rates rise, the market prices of both federal government and state and local government bonds fall. The possibility of rising interest rates is a major source of risk to investors in all fixed income assets.
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chapter 15 note - Chapter 15 Government Securities By Dr M...

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