What is a promissory note?? What is the significance of SBV bills and treasury bills to the economy? Let's learn about bills and interest rates on bills right below this article.
What is a promissory note?
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A treasury bill is a short-term financial instrument issued by financial institutions, governments, or other government agencies to raise capital. When purchasing a treasury bill, the investor is essentially lending money to the issuing organization, and will receive the principal plus interest at a certain point in the future.
Characteristics of state bank bills and treasury bills
State Bank Bills
Is a short-term valuable paper issued by the State Bank to implement monetary policy and is used as a tool to adjust the money supply in the market, stabilize exchange rates and interest rates.
Purpose
- Regulating the amount of money in circulation: Taking cash out of the market to control inflation and stabilize exchange rates.
- Providing investment tools: Allowing financial institutions to have additional safe, short-term investment channels.
Characteristic
- Short term: Usually has a term of less than 1 year.
- Low Risk: Considered a Tool financial investment Safe because issued by the State Bank.
- Fixed interest rate: Interest rate is fixed in advance and does not change during the term.
Treasury bills
Issued by the Ministry of Finance, usually with short or medium terms, and the main purpose is to raise capital to offset the state budget deficit.
Purpose
- Budgetary compensation: Helps the government raise capital to spend on state activities.
- Providing investment tools: Similar to State Bank bills.
Characteristic
- Short term: Usually has a term of less than 1 year.
- Low Risk: Considered a safe investment tool because it is guaranteed by the government.
- Market Interest Rates: Interest rates may change according to market developments.
Reasons why the state bank issues credit notes
The State Bank issues credit notes to:
Regulating the money supply
- Controlling inflation: When the economy overheats, the money supply increases too quickly compared to the output of goods and services, putting pressure on prices, leading to inflation. Issuing treasury bills helps to take money out of the market, reducing the amount of money in circulation, thereby controlling inflation.
- Macroeconomic stability: By adjusting the money supply, the State Bank contributes to macroeconomic stability, creating conditions for sustainable economic development.
Exchange rate stability
- Balancing foreign currency supply and demand: When the money supply is too large, the domestic currency tends to depreciate against foreign currencies. Withdrawing money through treasury bills helps balance foreign currency supply and demand, stabilizing the exchange rate.
- Protecting the economy from external shocks: A stable exchange rate helps reduce risks for import-export businesses and investors.
Interest rate adjustment
- Impact on market interest rates: The interest rate of treasury bills has a spillover effect on market interest rates. When the State Bank increases the interest rate of treasury bills, commercial banks will also increase lending rates to attract deposits, thereby reducing inflation and stimulating savings.
- Supporting other policy objectives: Interest rate adjustments through treasury bills can be used to support other policy objectives such as promoting credit growth and supporting small and medium enterprises.
Benefits and risks of investing in treasury bills
Treasury bills, especially government and State Bank bills, are often considered a safe and stable investment channel. However, like any other form of investment, treasury bills also come with certain benefits and risks.
Benefits of investing in treasury bills
- High liquidity: Treasury bills are easily bought and sold on the market, helping investors to quickly recover capital when needed.
- Low risk: T-bills are issued by reputable organizations such as the Government or the State Bank, so the risk of default is very low.
- Fixed interest rate: Treasury bills typically have fixed interest rates, allowing investors to predict their cash flow.
- Suitable for many subjects: Treasury bills are suitable for both individual and institutional investors, especially those with short-term investment needs and prioritize safety.
Risks of investing in treasury bills
- Low interest rates: Compared to other investment channels such as stocks or corporate bonds, interest rates on treasury bills are often lower due to low risk.
- Inflation risk: If the interest rate on a T-bill is lower than the inflation rate, the real value of the investment will decline.
- Liquidity risk: Although treasury bills are highly liquid, in some special cases, selling treasury bills may be difficult and affect the price.
- Interest rate fluctuation risk: For floating rate bills, the value of the bills may fluctuate downward when market interest rates increase.
Benefits and risks of investing in treasury bills
Impact of SBV withdrawing money through credit bills
The State Bank regularly uses treasury bills to withdraw cash from the market, in order to stabilize the exchange rate and control inflation. When issuing treasury bills, financial institutions will buy treasury bills from the State Bank, which means that a portion of the cash of these institutions will be transferred to the State Bank.
The State Bank's withdrawal of money through treasury bills has widespread and long-term effects:
Volatility to financial markets
- Stock market: When interest rates rise, investors tend to shift from the stock market to fixed-interest investment channels such as treasury bills, leading to cash flow withdrawal from the stock market and putting downward pressure on the index.
- Real estate market: High interest rates on home loans reduce demand for homes, which could freeze the real estate market.
Impact on economic sectors
- Manufacturing: Businesses will face higher capital costs, affecting their ability to invest in expanding production.
- Consumer sector: Consumer demand may decline as incomes are affected by rising interest rates and employment becomes more difficult.
Impact on exchange rates
- Short-term: Liquidity can help stabilize the exchange rate by reducing pressure on the domestic currency.
- Long term: If the tight monetary policy is prolonged, it can attract foreign investment flows, helping to increase the value of the domestic currency.
Impact on inflation
- Short term: Reducing the money supply helps curb inflation.
- Long term: If the economy goes into recession, the inflation rate may fall sharply.
Impact on economic growth
- Short term: Economic growth may slow down due to reduced investment and consumption demand.
- Long term: If policies are adjusted promptly and appropriately, economic growth can recover.
Meaning of Treasury Bill Interest Rate
Treasury bill interest rates, though small, carry enormous implications for the economy. They are not only a measure of the government's borrowing costs, but also have profound effects on many other aspects of financial markets.
Measure of government borrowing costs
- The interest rate on treasury bills reflects the cost the government has to pay to raise funds from the public. When interest rates rise, so does the government's borrowing costs.
- High interest rates will attract more investors to treasury bills, helping the government raise more capital.
Market interest rate impact
- T-bill interest rates are often referred to as “risk-free rates” because the risk of a government default is very low. Therefore, they serve as a benchmark for financial institutions to calculate interest rates on other loans.
- When the interest rate of treasury bills increases, commercial banks will also increase their lending interest rates to ensure profits. Conversely, when the interest rate of treasury bills decreases, lending interest rates also tend to decrease.
Reflects the index measuring inflation expectations
- The real interest rate is the nominal interest rate (quoted interest rate) minus the inflation rate. It reflects the actual return an investor receives after subtracting the impact of inflation.
- When investors expect inflation to rise in the future, they will demand higher interest rates to compensate for the risk of currency depreciation due to inflation. Therefore, the real interest rate of T-bills can be viewed as an indicator of the market's inflation expectations.
Conclude
Through understanding the concept of What is a promissory note?, we can see that state bank bills and treasury bills are important financial instruments, playing an indispensable role in managing monetary policy and stabilizing the macro economy.
With the support of investment platforms like HVA, individual investors can easily access the treasury bill market, take advantage of stable profit opportunities and contribute to the development of the economy. At the same time, it creates favorable conditions for investors to participate in the treasury bill market, opening up many attractive investment opportunities in the future.
