What Is Treasury Bills (T-Bills)?

Treasury Bills (T-Bills) are short-term securities issued by the U.S. Treasury with maturities ranging from a few days to one year, providing a safe investment option.

Treasury Bills (T-Bills) are short-term securities issued by the U.S. Treasury. These government-backed instruments have maturity periods ranging from a few days to one year, making them an attractive option for conservative investors seeking low-risk investments. Unlike other securities, T-Bills are sold at a discount to their face value, and investors earn the difference when the bill matures. T-Bills are commonly considered one of the safest investments available due to their backing by the full faith and credit of the U.S. government.

Key Characteristics of Treasury Bills

Types and Maturities

• 4-Week T-Bills: Maturity in 28 days.
• 13-Week T-Bills: Maturity in 91 days.
• 26-Week T-Bills: Maturity in 182 days.
• 52-Week T-Bills: Maturity in 364 days.

Purchase and Yield

T-Bills can be purchased through competitive and non-competitive bids during Treasury auctions. They do not pay periodic interest. Instead, they are issued at a discount, and the investor receives the face value at maturity. The yield is calculated as:

$$ \text{Yield} = \left( \frac{\text{Face Value} - \text{Purchase Price}}{\text{Purchase Price}} \right) \times \left( \frac{365}{\text{Days to Maturity}} \right) $$

Historical Context of Treasury Bills

Treasury Bills were first issued by the U.S. government during World War I to help fund wartime expenses. Over time, T-Bills have evolved to become a popular instrument for managing government debt and liquidity, as well as a key component in monetary policy.

Applicability and Uses

Investors

T-Bills cater to both individual and institutional investors looking for a safe, short-term investment vehicle. They are also used for parking idle funds while earning a small return.

Financial Institutions

Banks and other financial institutions use T-Bills for managing liquidity and satisfying regulatory requirements.

Comparisons and Related Terms

Treasury Bonds vs. Treasury Bills

• Treasury Bonds: Long-term instruments with maturities ranging from 10 to 30 years, paying semi-annual interest.
• Treasury Bills: Short-term instruments with maturities of less than one year, issued at a discount.

Certificates of Deposit (CDs) vs. Treasury Bills

• Certificates of Deposit (CDs): Offered by banks with fixed interest rates and various terms.
• Treasury Bills: Issued by the government with no periodic interest, providing higher liquidity.

FAQs

How do I purchase T-Bills?

T-Bills can be bought directly through the U.S. Treasury’s website (TreasuryDirect) or via brokerage accounts.

Are T-Bills taxable?

The interest earned on T-Bills is subject to federal income tax but exempt from state and local taxes.

What are the benefits and risks of investing in T-Bills?

Benefits: Low risk, high liquidity, and exemption from state and local taxes. Risks: Lower returns compared to other investments, exposure to inflation risk reducing real returns.

References

1. U.S. Department of the Treasury. TreasuryDirect. Link to TreasuryDirect.
2. Securities Industry and Financial Markets Association (SIFMA). Treasury Securities. Link to SIFMA.
3. Federal Reserve. Consumer Information. Link to Federal Reserve.

Summary

Treasury Bills (T-Bills) serve as a cornerstone of low-risk, short-term investments, primarily due to their government backing and short maturity periods. First introduced to fund wartime expenditures, T-Bills have become a go-to instrument for managing liquidity and government debt. Available in various maturities, T-Bills offer flexible and secure investment opportunities making them suitable for individual and institutional investors alike.