T - Bills Flashcards
(12 cards)
Why do governments issue Treasury Bills to finance budget deficits?
Because when government spending exceeds revenue, they need to borrow money. T-bills offer a quick way to raise cash without long-term commitment.
How do Treasury Bills help with government cash flow?
They smooth out imbalances since government revenues (like taxes) don’t arrive evenly throughout the year. T-bills allow operations to continue in between.
How do Treasury Bills relate to monetary policy?
Central banks use them to control money supply and interest rates. Selling T-bills reduces liquidity; buying them increases liquidity.
Why are T-bill yields important to the financial market?
Because they serve as a benchmark for short-term interest rates and the ‘risk-free’ rate, which affects pricing of other instruments.
Why are Treasury Bills attractive to certain investors?
They’re considered extremely low-risk. Investors like pension funds, banks, and foreign governments prefer them for security and liquidity.
How do Treasury Bills help in rolling over debt?
Governments can issue new short-term T-bills to pay off maturing debt, helping manage ongoing borrowing without default.
Are Treasury Bills truly risk-free in countries like Malawi?
No. While T-bills are considered risk-free in stable economies, in countries like Malawi they carry sovereign credit risk, inflation risk, and currency risk.
Why are high interest rates on T-bills in Malawi not necessarily attractive to investors?
Because they often reflect inflation control efforts, not a reward for investment. High yields can signal economic distress.
Can governments default on Treasury Bills?
Yes. Especially if there’s fiscal mismanagement, loss of central bank independence, or reliance on money printing to repay debts.
What is a sign of investor confidence in a government’s T-bill auction?
When the auction is oversubscribed—more investors bid than the amount the government wanted to borrow.
What does under-subscription in a T-bill auction indicate?
Low investor confidence, fear of default, or liquidity constraints in the financial system.
Why might investors hesitate to buy T-bills in a high-debt, low-growth economy?
Because repayment is uncertain, inflation could erode returns, and alternative investments may seem safer or more profitable.
