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Difference Between Treasury Bills vs Bonds
Treasury bills vs Bonds – Treasury bills are debt papers issued by the government or corporations in order to raise money and have a tenure of less than one year and are generally issued for tenures of 91 days, 182 days and 364 years. Whereas, Bonds are also a debt instrument issued by the government and corporations in order to raise debt. Tenure for corporate bonds is equal to or more than 2 years,
In this article, we look at the key differences between Treasury Bills vs Bonds in detail –
What is Treasury Bill?
- The T-bills issued by the government are issued by Federal Reserve in the US and Reserve bank of India in India, worldwide they are issued by the individual central banks.
- T-bills issued by the government are the safest instruments and do not have any kind of default risk as they are backed by the government. T-bills are traded in the financial markets and can be bought by anyone through various routes.
- In the more developed markets it can trade actively by individuals also but in lesser developed markets generally, they are bought through mutual funds. Return on the T-bills is tax-free for the investors.
- T-bills do not pay any coupon they are floated as a zero coupon bond to the investors at a discount to the face value. At the end of the maturity period, the investors get the interest from the instrument in the form of return by receiving the face value from the bill.
What are Bonds?
- Bonds can be issued for various maturity which includes 2 years bonds, 5 years bonds, 10 years bonds or even 30 years bonds.
- Bonds issued by the government are risk-free and do not have any default risk as they are backed by the government.
- Bonds issued by the corporate have default risk. Government-issued bonds are the tax-free instrument but the corporate bonds are not tax-free for the investors.
- The bondholders receive investor as a return on investment in the form of coupon payment generally quarterly or semi-annually.
Treasury Bills vs Bonds Infographics
Here we provide you with the top 5 difference between Treasury Bills vs Bonds
Treasury Bills vs Bonds– Key Differences
The key differences between Treasury Bills vs Bonds are as follows –
- T-bills are debt instruments issued by the government or the corporate with tenure less than one year with popular tenures being 91 days, 82 days and 364 days. Bonds are debt instruments also issued by the government or corporate for tenure equal to or more than 2 years period.
- T-bills do not pay any coupon they are floated as a zero coupon bond to the investors, they are issued at discounts and the investors receive the face value at the end of the tenure which is the return on their investment. Bonds pay interest in the form of a coupon to the investors quarterly or semi-annually.
- T-bills have no default risk irrespective of the fact that whether they are issued by the government or by the corporate. Government bonds are risk-free but the corporate bonds have a default, there are several rating agencies like Moody’s and S&P who rates the corporate bonds so that the investors can take an informed decision in terms of risk involved for a particular bond.
- The interest rate on a T-bill is generally lesser than the interest rate for a bond as the tenure holding by the investor for the bond is higher and also the risk is higher.
Treasury Bills vs Bonds Head to Head Difference
Let’s now look at the head to head difference between Treasury Bills vs Bonds
|Basis – Treasury Bills vs Bonds||Treasury Bills||Bonds|
|Definition||Treasury bills are debt papers issued by the government or corporate in order to raise money. T-Bills have the tenure of less than one year.||Bonds are also debt instrument issued by government and corporate in order to raise debt. Tenure for corporate bonds is equal to or more than 2 years|
|Tenure||T-Bills have the tenure of less than one year and are generally issued for tenures of 91 days, 182 days and 364 years. These three maturity period are the more popular ones though T-bills are issued for other tenures as well.||Bonds are issued for tenure for more than two years. Generally, bonds are issued as 2 years bond, 5 years bond 10 years bond and also 30 years bond|
|Coupon rate||T-bills do not pay any coupon they are floated as a zero coupon bond to the investors at a discount to the face value. At the end of the maturity period, the investors get the interest from the instrument in the form of return by receiving the face value from the bill.||Bonds pay their investors to interest for holding the bond in the form of coupon payments, generally, the coupon is paid quarterly or semi-annually to the investors.|
|Implication of tax||In case of T-bills whether it is issued by the government or corporate there is no tax to be paid by the investors.||Government-issued bonds are the tax-free instrument but the corporate bonds are not tax-free for the investors.|
|Default risk||T-bills have no default risk irrespective of the fact that whether they are issued by the government or by the corporate.||Bonds issued by the government are risk-free and do not have any default risk as they are backed by the government. Bonds issued by the corporate have default risk.|
Both T-bills and bonds are debt instruments issued by the government or corporate in order to raise debt. The interest on the T-bills is generally lower than the bonds as the risk and tenure for holding a T-bill is lower than that of a bond. In rare situation when investors’ fear of a recession the yield curve inverts this is popularly known as the inverted yield curve. Bonds and T-bills issued by the government are backed by the government and do not have any default risk.
This has been a guide to the Treasury Bills vs Bonds. Here we discuss the top differences between Treasury Bills and Bonds along with infographics and comparison table. You may also have a look at the following articles –