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Treasury bill
3 key takeaways
Copy link to section- Treasury bills are short-term debt securities issued by the U.S. government with maturities ranging from a few days to one year.
- They are sold at a discount to their face value, and the interest earned is the difference between the purchase price and the face value.
- T-bills are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
What is a Treasury bill?
Copy link to sectionA Treasury bill (T-bill) is a short-term government security that is issued at a discount and matures at its face value. T-bills do not pay periodic interest (coupon payments); instead, the interest is the difference between the discounted purchase price and the face value received at maturity. They are commonly used by the government to raise funds for short-term needs and by investors as a secure, liquid investment.
Characteristics of Treasury bills
Copy link to sectionTreasury bills have several key characteristics:
- Maturity: T-bills have short-term maturities, typically ranging from a few days to 52 weeks (one year). Common maturities are 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.
- Discount pricing: T-bills are sold at a discount to their face value. For example, an investor might purchase a T-bill with a face value of $1,000 for $980. At maturity, the investor receives the full $1,000.
- No periodic interest: T-bills do not pay periodic interest. The return to the investor is the difference between the purchase price and the face value at maturity.
- Low risk: T-bills are considered one of the safest investments available because they are backed by the full faith and credit of the U.S. government.
- High liquidity: T-bills are highly liquid, meaning they can be easily bought and sold in the secondary market with minimal price fluctuations.
How Treasury bills work
Copy link to sectionInvestors purchase Treasury bills through auctions conducted by the U.S. Treasury. T-bills can be purchased in two ways:
- Competitive bidding: In a competitive bid, the investor specifies the yield (interest rate) they are willing to accept. If the bid is accepted, the T-bill is purchased at the specified yield.
- Non-competitive bidding: In a non-competitive bid, the investor agrees to accept the yield determined at auction. This guarantees that the investor will receive the T-bill, but the yield is not predetermined.
At maturity, the U.S. Treasury pays the face value of the T-bill to the investor. The difference between the purchase price and the face value represents the interest earned.
Example of a Treasury bill
Copy link to sectionConsider an investor who purchases a 26-week T-bill with a face value of $1,000 at a discounted price of $980. The interest earned at maturity is calculated as follows:
Interest Earned = Face Value − Purchase Price
Interest Earned = $1,000 − $980 = $20
The yield can be calculated using the following formula:
Yield = (Interest Earned / Purchase Price) × (365 / Days to Maturity)
Yield = ($20 / $980) × (365 / 182) ≈ 4.08%
Uses of Treasury bills
Copy link to sectionTreasury bills are used for various purposes:
- Government financing: The U.S. government uses T-bills to finance short-term funding needs and manage cash flow.
- Investment: Investors, including individuals, institutions, and foreign governments, use T-bills as a secure, low-risk investment option.
- Liquidity management: Financial institutions and corporations use T-bills to manage liquidity, as they can be easily converted to cash.
Role in the economy
Copy link to sectionTreasury bills play a vital role in the economy:
- Safe haven: T-bills provide a safe investment option during times of economic uncertainty or market volatility.
- Benchmark rates: The yield on T-bills is often used as a benchmark for short-term interest rates and a reference point for other debt instruments.
Understanding Treasury bills is essential for investors and policymakers. For further exploration, topics such as government securities, interest rate risk, and fixed-income investing provide deeper insights into the significance and functioning of Treasury bills in the financial markets.
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Sources & references

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