The U.S. Treasury Department generates cash by selling Treasury bills, bonds, and notes to investors. When an investor purchases these securities, they are lending money to the U.S. government in exchange for the principal plus interest at maturity. Treasury bills have short maturities of 3-6 months, while Treasury notes and bonds have longer maturities. The interest rate paid on these low-risk securities varies depending on economic conditions, as seen in the decreasing yields on 3-month Treasury bills from 2007-2011 reflecting the slowing economy.

1. 8/22/11

2. Treasury Bonds To generate cash the U.S. Treasury Dept. prints and sells Treasury Bills, Bonds, and other similar types of notes.

3. Treasury Bonds Purchasing a Treasury Note means that you are lending money to the U.S. government. In exchange, the government will pay you back the money with interest.

4. Treasury Bonds This is how a Treasury Note works. The government will issue a note with a face value of $1000. Your cost for the note is less than $1000, e.g., $990. When the note matures, the government pays you $1000. The interest you earn is the difference between the $1000 and the price you paid. Face value: $1000 Your cost: <$1000

5. Treasury Bonds The amount of time needed to earn back the money paid and interest is known as the Maturity. Treasury Bills can have Maturities of 3 months or 6 months. To calculate the interest earned, use this formula. FV = Face Value of the Note PP = Purchase Price of the Note M = Maturity

6. Treasury Bonds The Treasury Dept. auctions Treasury securities several times throughout the year. These include: T Bills Treasury Notes Treasury Bonds TIPS This table shows the results of a recent Treasury auction. Let’s look at a 13- week T Bill.

7. Treasury Bonds Using the interest formula, we find that the interest on the T Bill is 0.035%. This is not a very high percent. Why is it so low? FV = $1000 PP = $999.91 M = Maturity

8. Treasury Bonds In fact, the yield on all Treasury securities varies. This chart shows the change in 3-month T Bills from 2007 to 2011. Note how the interest rates have significantly decreased. This reflects the slowdown in the U.S. economy over the past few years.

9. Treasury Bonds Treasury securities are still a good investment for a number of reasons: Backed by the U.S. government A guaranteed return on investment