Treasury Bills (T-Bills)

Treasury Bills (T-Bills) Meaning

Treasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government. In return the investors get a steady interest income. The maturity period for a treasury bill is less than one year.

These short-term debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans.read more are issued at a discounted price, but while redeeming, investors get at par value.  This yields marginal interest to the holders. Treasury Bills are considered a safe investment as the sum collected is not invested in the stock market.  The government uses these funds for welfare schemes, capital project financing, operating expenses, and other financial obligations.

Key Takeaways
  • Treasury bills are a type of zero-coupon security where the central government borrows funds from the individual for a period of 364 days or less. In return, the investors receive interest.
  • These money market instruments provide a return on investment at once, and there is no provision for periodic returns. Also, the income so generated is the difference between the at par value (redeemable price) and the discounted price of the T-Bill.
  • The Treasury Department is responsible for issuing T-Bills in the US, and the Federal government guarantees repayment.
  • The government imposes a federal income tax on the yields from the T-Bills.

Treasury Bills

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How do Treasury Bills Work?

By buying treasury bills, the investors loan money to the US government. In exchange, they get a defined rate of return known as the yield. The maturity period is less than 364 days. Holders purchase government-backed securities with a maturity period below one year. The face value of a T-Bill is higher than its discounted value. Therefore, the face value becomes the at par rate or redemption value upon maturity. Also, the discounted price is the amount at which this security is offered for purchase.

 The government utilizes the funds to finance its spending requirements. For example, the US Treasury’s job is to raise money for government expenses and pay the nation’s bills. While levying taxes is one of the ways to raise funds, another route is through the issue of T-Bills and other bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more in the open market. As for the investors, the government’s backing makes T-Bills a relatively safer investment. This is unlike stocks that are highly prone to market fluctuations. Usually, the investment comes with low risks and low but steady gains.

T-Bills are for investors with a low risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more who prefer to invest funds for a short period. While the minimum purchase is just $100, up to $5 million non-competitive T-Bills can be purchased in a single auction. Competitive ones can be purchased up to 35% of the offering amount. According to US Treasury Department, the treasury bills rates on 3rd September 2021 were as follows:  

TypeRate
4 Week T-Bill 0.04
8 Week T-Bill0.07
13 Week T-Bill0.05
26 Week T-Bill0.05
52 Week T-Bill0.07

One of the most common ways of buying T-Bills in the US is through the online platform. “TreasuryDirect” is authorized by the US Treasury Department. The investors need to create an online “TreasuryDirect” account and initiate the electronic transaction via this account. In addition, many brokers and dealers offer primary T-Bills to the public. These debt instruments are available for reselling and purchasing through secondary market trading, banks, and other financial organizations.

Features of Treasury Bills

The features of T-Bills are as follows:

  1. Debt Instruments: Treasury bills belong to the category of debt instrument. It is an obligation through which the issuing party can raise funds with a promise to repay a fixed amount to the lender on a specified date or as per the contract terms.
  2. Short Term: T-Bills have a period of less than one year or a maximum of 52 weeks; therefore, these are considered to be short-term debt instruments.
  3. Maturity Periods: Generally, these are introduced with a maturity period of 4, 8, 13, 26, and 52 weeks.
  4. Safety: T bills are issued by the government of a country hence categorized as the safest debt instruments. It has the lowest possible risk.
  5. Interest Rates: Although it doesn’t pay regular interest but is issued at a discount and redeemed at its par value on maturity.
  6. Returns: The investor will receive the excess amount of the maturity price (at par value) over its issuance price. With an extended period to maturity, the return rises.
  7. Purchase: Fresh or primary issues by the government can be bought through online auctions (primary market purchase). While already issued T-Bills can be acquired from the existing holders via secondary market platforms.
  8. Issuance: In the US, T bills are issued in denominations of $1000. However, a purchase can even reach a maximum of $5 million.
  9. Taxation: Though the local and state governments don’t levy any taxes on the interest earned on T-Bills, it is chargeable under the federal income tax.

Treasury Bills Example & Calculations

T-Bills don’t pay regular interest but are issued at a discount (i.e., a reduced value) and redeemed at their par value on maturity. Thus, an investor can purchase T-Bills at a price below the actual face value, and the interest is reflected in the final amount received by the investor. In addition, due to shorter due dates, it becomes convenient to avoid remitting regular interest payments, and the discounted value serves as the final return to the investor.

For example, The US Federal Treasury Department issued 52week T-Bills at a discounted rate of $97 per bill at face value of $100. An investor purchases 10 T-Bills at a competitive bid price of $97 per bill and invests a total of $970.

After 52 weeks, the T bills matured. Upon maturity, the Federal Treasury paid a total amount of $1000 to the investor, i.e., $100 for every bill held. The investor did not receive any payment in the form of interest during this period of 52 weeks. However, the final yield or profit amounted to $30, computed as follows:

Treasury Bills Example 1
Treasury Bills Example 1-1

Advantages

Treasury bills are the most secure form of debt instruments as they hold the government’s assurance of repayment. Even in periods of economic slowdown or instability, T-Bills assure the promised returns to the investors. As these securities mature within a year, it provides liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more to the investors. Further, these investment products can be purchased in the primary and secondary marketsSecondary MarketsA secondary market is where securities are offered to the general public after being offered in the primary market. Such securities are usually listed on the stock exchange. A significant portion of trading happens in such a market and are of two types – equities and debt markets.read more, ensuring easy exchange.

Since T-Bills facilitate government borrowings to serve the short-term capital requirement of the nation, their benefits also extend to the citizens and the society indirectly. Moreover, in the US, T-Bills can be purchased for as low as $100, making it an affordable money market instrument. Retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more can also buy these securities.

Disadvantages

The risk-free feature of the T-Bills comes at the cost of low returns; moreover, it doesn’t provide a regular return, and the interest is received in the form of a margin above its discounted value.

The investors have to pay the Federal income tax over the interest earned on such securities. It even has an opportunity cost since the investors miss the chance of making a higher return from investing in the equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.read more or stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more during the same period.

Frequently Asked Questions (FAQs)

What is a treasury bill?

A treasury bill is a government-issued short-term debt instrument. Within a year, the government pays back the amount with interest. While it is issued at a discounted value, investors redeem it at par value. It is considered among the safest investment as it is backed by the government of a nation and released by its finance department.

How to invest in treasury bills?

Treasury bills can be purchased through:
1. Primary market: The first issue can be directly bought online through an auction or from TreasuryDirect. Alternatively, It can also be purchased from brokers and dealers.
2. Secondary market: Existing T-Bills can be purchased via online securities market trading or from offline facilities like banks.

Can you lose money on Treasury bills?

T-Bills are highly secured investment vehicles for the holders. The federal government guarantee ensures zero risks to the investors and no loss to the principal sum invested.

This has been a guide to Guide to what Treasury Bills (T-bills) are and their definition. Here we discuss their features, advantages, disadvantages, and examples. You can learn more about financing from the following articles –