Treasury Bills Vs Bonds
Last Updated :
21 Aug, 2024
Blog Author :
Wallstreetmojo Team
Edited by :
N/A
Reviewed by :
Dheeraj Vaidya
Table Of Contents
What Are Treasury Bills Vs Bonds?
Treasury bills are debt instruments that the central bank issues on behalf of the government with tenure that is less than a year, and these have negligible chances of default risk. In contrast, Bonds are issued for more than or equal to two years, and these can either be default or risk-free, depending on their type.
Treasury bills are debt papers issued by the government or corporations 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. Bonds are also a debt instrument issued by the government and corporations to raise debt. Tenure for corporate bonds is equal to or more than two years.
Table of contents
Treasury Bills Vs Bonds Explained
T-bills and bonds are debt instruments issued by the government or corporations to raise debt. Bonds and T-bills issued by the government are backed by the government and do not have any default risk. The interest on the T-bills is generally lower than the bonds as the risk and tenure for holding a T-bill are lower than that of a bond. When investors fear a recession, the yield curve inverts in rare situations. This is popularly known as the inverted yield curve.
However, both of them different in various ways which we will study in this article. The differences in US treasury bills Vs bonds can be identified in terms of maturity dates, the terms of interest payment, the main objective of investment, etc. But both are very useful investment instruments used by investors who have low risk appetite but want a steady return in their investments.
Both treasury bills Vs government bonds are widely used to diversify investment portfolios so as to maintain a balance in the between risk and return, which also depends on the investment objective and time horizon. Such kind of investment avenues date back to the times of Revolutionary War, when the Treasury Department of the United States used or sold debt instruments to raise money to finance government expenditure, providing risk free return to investors.
What Is Treasury Bill?
- Federal Reserve issues the T-bills issued by the government in the US and the Reserve bank of India in India. Worldwide they are issued by individual central banks.
- T-bills issued by the government are the safest instruments and do not have any default risk as the government backs them. 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 a return by receiving the face value from the bill.
What Are Bonds?
- Bonds can be issued for various maturity, which include two years bonds, five years bonds, ten years bonds, or even 30 years.
- Bonds issued by the government are risk-free and do not have any default risk as the government backs them.
- Bonds issued by the corporate have default risk. Government-issued bonds are tax-free instruments, but the corporate bonds are not tax-free for investors.
- The bondholders receive investors as a return on investment in coupon payments, generally quarterly or semi-annually.
Infographics
The infographics given below show the differences in US treasury bills Vs bonds in a concise and systematic format. It helps the reader to interpret and remember the points easily. Let's see the top differences between treasury bills vs. bonds.
Key Differences
The key difference section given below regarding treasury bills Vs government bonds highlights the important point of differences between the two topics with a lot of clarity and details. Let us study them and understand the two concepts clearly.
- T-bills are debt instruments issued by the government or the corporate with a tenure of 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 two years period.
- Bonds pay interest in the form of a coupon to the investors quarterly or semi-annually. T-bills do not pay any coupon. They are floated as a zero-coupon bond to the investors, issued at discounts, and the investors receive the face value at the end of the tenure, which is the return on their investment.
- T-bills have no default risk, irrespective of whether they are issued by the government or by the corporate. Government bonds are risk-free, but corporate bonds have a default. Several rating agencies like Moody's and S&P rate corporate bonds so that the investors can make an informed decision regarding the 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 the risk is higher.
Example
Let us understand the concept of which is better treasury bills or bonds, with the help of a suitable example.
If we assume that a Mack wants to invest in a secured debt instrument and has $5000 with him. He may consider investing in either bons or T Bills, since both are safe and provide steady return.
If he decides to invest the money in T-Bills, whose face value is $100, and gets it at a discount of $4, then he is actually paying only $96 to purchase the financial instrument. Thia discount amount is his return. At the end of maturity period, he will receive the face value of the T-bills, which is $100 each.
However, if he decides to invest in government bonds, he may go for 10-year bonds, with coupon rate of 4%, and invests $5000 in it. If the coupon payment is semi-annual, he will get interest twice which will amount to $100 each . At the end of maturity of 10 years, Mack will get the face value which is $5000 along with his semi-annual interests. Thus, the above example makes the difference easy to understand.
Comparative Table
The comparative table below shows the differences in a tabular format points them out on the basis of their time period, the rate of interest or coupon rate, any level of risk involved and also the tax implications.
Basis | Treasury Bills | Bonds |
---|---|---|
Definition | Treasury bills are debt papers issued by the government or corporations to raise money. T-Bills have a tenure of less than one year. | Bonds are also debt instruments issued by government and corporations to raise debt. Tenure for corporate bonds is equal to or more than two years. |
Tenure | T-Bills have a tenure of less than one year and are generally issued for tenures of 91 days, 182 days, and 364 years. These three maturity periods 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 two years bonds, five years bonds ten, years bonds, and also 30 years bonds. |
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 a return by receiving the face value from the bill. | Bonds pay their investors to interest in holding the bond in coupon payments; generally, the coupon is paid quarterly or semi-annually to the investors. |
Implication of tax | In the case of T-bills, whether the government or a corporation issues them, there is no tax to be paid by the investors. | Government-issued bonds are tax-free instruments, but the corporate bonds are not tax-free for investors. |
Default risk | T-bills have no default risk irrespective of 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 the government backs them. Bonds issued by the corporate have default risk. |
Thus, if we try to analyse which is better treasury bills or bonds, it is to be noted that both the financial instruments are free from risk since they are backed by the US Government with full credit. Since the economic condition of the country is considered to be very strong and stable, investors can depend on these instruments for keeping their inevstments safe and secured. They get back the full amount including the interest and face value at the time of maturity.
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