What is a Treasury bill?
Treasury bills — or T-bills — are short-term U.S. debt securities issued by the federal government that mature over a time period of four weeks to one year. Since the U.S. government backs T-bills, they're considered lower-risk investments.
T-bills are sold in increments of $100 (up to $10 million). The most common terms for T-bills are for four, eight, 13, 17, 26 and 52 weeks. The shorter terms to maturity differentiate them from other Treasury-issued securities.
🤓Nerdy Tip
While interest rates and inflation can affect Treasury bill rates, they’re generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.
How Treasury bills work
Treasury bills are assigned a par value (or face value), which is what the bill is worth if held to maturity. You buy bills at a discount — a price below par — and profit from the difference at the end of the term.
While T-bills don’t pay interest like other Treasurys, the difference between your discounted price and the par value is essentially the "interest" earned. It's as simple as that — you gave the government a short-term loan by buying T-bills, and they paid you back with "interest" at the end of the term.In other words, T-bills pay no interest payments leading up to their maturity.
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T-bill purchase example
To see how a Treasury bill purchase works, let's look at a Treasury bill auction. On June 14, 2023, the Treasury held an auction for a 17-week Treasury bill with an issue date of June 20 and a maturity date of Oct. 17. The price per $100 amounted to about $98.30, or an annualized discount rate (shown as "high rate" in TreasuryDirect) of 5.15%.
If you set your purchase price to be $1,000 for this auction, you would have paid $982.98 on June 20. On October 17, you'd receive $1,000, earning $17.02 on your investment.
Now, if you were to theoretically reinvest in this T-bill for one year, you could arrive at an annual investment rate for your 17-week T-bill based on the actual purchase price of $982.98.
To explore how this works, use our T-bill calculator below.
Treasury bill rates compared to other Treasury securities
Treasury bills, notes and bonds are three types of U.S. debt securities that mainly differ in the length of maturity (shortest to longest). Treasury notes are intermediate-term investments that mature in two, three, five, seven and 10 years. Treasury bonds mature in 20 or 30 years. Unlike T-bills, Treasury notes and Treasury bonds pay interest every six months. Below are the current rates for various Treasury securities:
» Learn more: Treasury bonds vs. notes vs. bills
Are Treasury bills a good investment?
Ultimately, whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon and financial goals.
T-bills are known to be low-risk short-term investments when held to maturity since the U.S. government guarantees them. Investors owe federal taxes on any income earned but no state or local tax.
However, Treasury bills also typically earn lower returns than other debt securities and even some certificates of deposit. As a result, Treasury bills may be most advantageous to conservative investors who are less willing to take risks but still want to earn a little interest.
What causes Treasury bill rates to fall?
Keep in mind that economic growth or decline, interest rates and inflation can affect Treasury bill rates. Here's how it works.
Demand for T-bills often drops during inflationary periods if the discount rate offered doesn't keep pace with the inflation rate.
The Federal Reserve sets lending rates between banks. It can lower the rate to encourage lending or raise the rate to contract the amount of money in the economy. When interest rates are high, as in 2023, investors tend to look toward higher-yield investment options and away from lower-yield Treasury bills.
» Ready to get started? Compare the best online brokers for buying bonds
Next Steps:
I've been immersed in finance for quite some time, exploring various investment vehicles like Treasury bills. These bills are short-term debt securities issued by the U.S. government, typically maturing within four weeks to a year. They're considered low-risk because they're backed by the full faith and credit of the U.S. government. The process of purchasing T-bills involves buying them at a discount to their face value, and the difference is essentially the return on investment.
Here's a breakdown of the concepts in the article:
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Treasury Bills (T-bills):
- Short-term U.S. debt securities issued by the federal government, maturing within four weeks to a year.
- Sold in increments of $100, commonly for terms of four, eight, 13, 17, 26, and 52 weeks.
- Considered lower-risk due to government backing.
- No interest payments during the holding period; instead, they're purchased at a discount and redeemed at face value upon maturity.
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How T-bills Work:
- T-bills have a par value (face value) at maturity.
- Purchased at a discount, and the difference between the discounted price and the par value represents the yield.
- They do not pay interest in the typical sense; the return is based on the discounted purchase price.
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T-bill Purchase Example:
- An auction scenario where a 17-week T-bill was issued with an issue date of June 20 and a maturity date of Oct. 17, sold at a discount.
- Calculation involved purchasing at a price lower than the face value and receiving the face value at maturity.
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Comparison with Other Treasury Securities:
- Differentiated by maturity: T-bills are short-term, while Treasury notes and bonds have longer durations.
- T-notes and T-bonds pay interest every six months, unlike T-bills.
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Are T-bills a Good Investment?:
- Considered low-risk due to government backing but typically offer lower returns compared to other investments.
- Suitable for conservative investors seeking security over higher returns.
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Factors Affecting T-bill Rates:
- Economic conditions like inflation, interest rates, and overall economic growth influence T-bill rates.
- High-interest rates may drive investors towards higher-yield options, affecting T-bill demand.
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Further Reading Topics:
- Fixed-income securities: Investments providing a fixed return, like bonds.
- How to purchase Treasurys.
- Opening a brokerage account.
- Understanding and interpreting the 10-year Treasury yield and its significance in the market.
Understanding these concepts can be a stepping stone to delving deeper into the world of fixed-income securities, government debt instruments, and the dynamics of interest rates and their impact on investments.
