The Commonwealth Government issues Treasury notes and Treasury bonds. Explain the difference between the two debt instruments, clearly distinguishing between the uses of the two instruments.

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Treasury notes and bonds are a discount security issued by the Reserve Bank on behalf of the Commonwealth government. The difference between treasury bonds and treasury notes is their length until maturity. Treasury notes mature in more than a year, but not more than 10 years from their issue date. Bonds, on the other hand, mature in more than 10 years from their issue date. Also, bids for treasury bonds must be for $100 000 or more whereas the minimum bid for treasury bonds stand at $1000.

Treasury notes are issued to smooth the commonwealth government's cash balances. For example, when government expenditures exceeded collections by $8 billion in August 2000, $6 billion worth of treasury notes were issued to fund the expenditures maintaining cash rates at a comfortable level (Tom Valentine, Guy Ford, Richard Copp; Financial Markets and Institutions).

Treasury bonds come in two forms, coupon bonds and treasury indexed bonds.

Coupon bonds are bonds that make regular payments as well as its face values at maturity. These payments are made semi-annually. Because of this, coupon bonds appear more attractive to long term investors who require consistent cash flow. Treasury indexed bonds are bonds in which the face value is indexed at the rate of inflation which guarantee investors a real rate of return. The coupon rate is paid quarterly instead of semi-annually. The government raises funds by issuing treasury bonds

Therefore, we can see that treasury notes, not treasury bonds, are issued to smooth the commonwealth government's cash balances because the minimum face value of treasury notes are much higher than that of treasury bonds.