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Treasury Bills (T-Bills) and Interest Rates Summary

Here is some brief notes on the function and descriptions of these financial instruments.

Treasury Bills (T-Bills)

Government of Canada issues T-Bills in certain lengths: 98,182, 364 days
– issued in denominations of $1000.00
– bought at a discount
– pay no regular interest (no coupons)

*When T-bills go up, interest goes down*

Some Keys on Interest Rates

– The “price” of money is the interest rate. Another way to help your understand the function of interest rates is to think of it as the “rent” you get from letting others use your money for a period of time.

– Hike all prices in the economy, interest rates dictated by supply and demand.

– Two theories: 1) Loanable funds and 2) Liquidity Preference

(Both look only at the financial system and not the real economy; both are only partial equilibrium theories)

– The real economy impacts the financial economy and vice versa.

Loanable Funds Theory: The SR equilibrium of interest rates is determined by the supply and demand for loanable funds.

– Supply loanable funds comes from consumers.

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