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  • The Federal Reserve Board

  • Fiscal Policy

  • Gross Domestic Product

  • P/E Ratio Defined

  • Bonds

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    BONDS

    Bonds are long-term loans used by companies and by local, state, and federal governments to raise funds and pay off debt. The biggest seller of bonds is the U.S. government. Our federal Treasury sells securities -- bonds, savings bonds, treasury bills, and notes, and guarantees that interest and principal payment will be paid on time.

    Selling bonds generates cash in the short term, but leaves the seller in debt. The U.S. governmnet owes money to a vast vast array of creditors, most of them outside the U.S.

    Most of the debt of the U.S. government is in the form of Treasury bills, Treasury notes, or Treasury bonds. Treasury bills (or T-bills) are short-term securities that mature one year or less from their issue date. Treasury notes mature more than a year, but not more than 10 years, from their issue date. Bonds mature more than 10 years from their issue date.

    A small proportion of the national debt comes from the sale of U.S. savings bonds. Savings bonds are Treasury securities that are payable only to the person to whom they are registered. Savings bonds can earn interest for up to 30 years, but you can cash them in after just 6 months.

    Unlike savings bonds, Treasury bills, notes, and bonds are transferable, so you can buy or sell them in the securities market. Also, bills, notes, and bonds are usually electronic -- they're not paper securities like savings bonds.

    How much of this U.S. debt is out there? At the end of February 2001, the federal government owed about $5,720,946,961,207. That's five trillion, seven hundred and twenty billion, nine hundred and forty-six million, nine hundred and sixty-one thousand, two hundred and seven dollars -- about $20,000 for every man, woman, and child in the country.

    Does any of this government debt make a difference? Not surprisingly, economists are divided. But the conventional view -- to which most economists subscribe -- is that when the government issues debt and spends the money, it stimulates demand and economic growth in the short run. But over time, government borrowing crowds out business borrowing and reduces national income. It's an economic balancing act, and although debt is not a bad thing, the government, just like you and I, should only go into debt for productive reasons.


    To hear Professor Marvin Zonis, from the University of Chicago Graduate School of Business, talk about the Gross Domestic Product, check out our One Minute MBA video clip. Just click the appropriate connection speed in the video box on the right column of this page.



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