Three products, three questions
A certificate is a savings product you buy from a bank, and the bank sets its terms, such as the term, the return and whether you can redeem early. Treasury bills and government bonds are debt the state issues, and the central bank runs their auctions as agent of the Ministry of Finance. A bill and a bond differ mainly in term and in how they pay. Companies can issue bonds too, but this lesson focuses on government treasury bonds.
The T-bill: a discount, not a coupon
A bill is short-term, issued in 91, 182, 273 and 364-day tenors. It pays no periodic return: you buy it below its face value and at maturity you get the full face value back. The difference between the two prices is your gain.
The bond: coupons and a moving price
A bond runs longer, for years, and usually pays a periodic coupon, fixed or floating, then returns the face value at the end. Some bonds carry no coupon and work on a discount like a bill. Held to maturity, you receive the payments set by its terms, provided the issuer meets its obligations. Sell before that, and its price is set by market rates at the time.
Why? Take an invented bond with a fixed 15% coupon, and suppose market rates then rise to 20%. Nobody will pay full face value for it when a new bond pays 20%, so its price falls. If rates drop, its price can rise. Price and rates move in opposite directions.
Follow the returns
The rates page shows savings returns you can compare with inflation and interest rates.
Check yourself
1. A bill with face value 50,000 was bought for 45,000. What is your gain at maturity before tax?
2. You hold a fixed-coupon bond and market rates rise. If you sell now, what likely happens to its price?
Summary
- A certificate comes from a bank on its terms; bills and bonds are debt issued by the state.
- A bill is short and sold at a discount; a bond runs longer and usually pays a coupon.
- A bond's price moves against interest rates if you sell before maturity.