Difference between Notes, Bonds and Bills
Because of the economic crisis that we are experiencing at present, a lot of people turn to financial institutions for loans, especially on a long term just to make ends meet. But because of the recession, even financial companies are becoming very careful in choosing the people or businesses they lend money. As a matter of fact, most of these institutions would not lend you anything unless you show something that they can hold on to for their security. This is where bonds, notes and bills come into play. In today's world, having one of these documents will be an edge because you can hold on to it or either sell it, whichever you choose that fits.
A bond is a type of loan security where the issuer (borrower) of the same owes a specific amount to the holder (lender) of the bonds, and is obliged to pay interests, which are also known as coupons. Bills, also known as T-bills (treasury bills) are issued by the government which are often short-term in nature where the maturity would be less than or equal to one year. Usually, these bills can be bought in different denominations and are considered as the safest of all marketable securities. Notes on the other hand are the most liquid of all types of obligations. Issued by the bank, it is payable to the bearer of the note on demand. This is more popularly known as money or legal tender.
Bonds come in different types, and they have the largest number of classes. The most popular ones include fixed rate bonds, which have a constant interest rate throughout its life; zero-coupon bonds, which pay no interest but are discounted to par value (lower than the face value or principal); and bearer bonds which are bonds issued without a holder. Bills on the other hand, differ in maturity dates. The types of bills include ad-hoc bills, 12-month bills, 6-month bills and 3-month bills. Notes on the other hand, or cash has two types - the paper bills and coins.
Bonds are public instruments and because of this, they have a lot of features which include the face value - which is more popularly known as the principal or the original amount to be paid by the borrower, the issue price which is the price at which they sell the bonds. These are almost the same as the principal amount. The bond also has a maturity date, or the date when the obligation is due and can be demanded. Finally, the interest or coupon, which is the rate the borrower is supposed to pay the lender. Treasury bills have the same features as the bonds payable. What differs from the two is the length of the maturity. Notes on the other hand only have the face value or the amount stated in the paper note itself.
Similarities and Differences
- Bonds have the longest maturity in all of these instruments and bear the biggest denomination.
- Bills have lesser maturity dates and can be bought in different and smaller amounts
- Notes are the most liquid of these instruments which can be used for trade.