Treasury bill

A Treasury bill (T-bill) is a short-term debt instrument issued by the U.S. Department of the Treasury with maturities ranging from a few days to one year.
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Updated: May 30, 2024

3 key takeaways

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  • 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?

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A 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

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Treasury 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

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Investors 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

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Consider 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

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Treasury 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

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Treasury 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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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.