Definition
Treasury Bills (T-bills) are short-term government debt securities that mature in one year or less. They are issued by the U.S. Department of the Treasury and sold at a discount to their face value. Upon maturity, the government pays the holder the full face value, making T-bills a way to lend money to the government for a short period.
Characteristics of Treasury Bills
No Coupon Rate
Unlike other government bonds, T-bills do not pay periodic interest. Instead, they are issued at a discount, and the difference between the purchase price and face value at maturity represents the investor’s earnings, known as the “discount yield.”
Maturities
T-bills are available in various maturities:
- 4 weeks
- 8 weeks
- 13 weeks
- 26 weeks
- 52 weeks
High Market Liquidity
T-bills are highly liquid securities, meaning they are easily bought and sold in the secondary market. Their high liquidity makes them a preferred investment for both individual and institutional investors seeking short-term investment options.
Special Considerations
Risk-Free Investment
T-bills are considered one of the safest investments available since they are backed by the full faith and credit of the U.S. government. They are generally regarded as free from default risk.
Tax Considerations
Interest income earned from T-bills is exempt from state and local income taxes but is subject to federal income tax. This makes them particularly attractive for residents of states with high income taxes.
Examples
Example Calculation
An investor purchases a $10,000 T-bill at a discount price of $9,800. Upon maturity in 26 weeks, the investor receives the full face value of $10,000. The discount yield or earnings from this investment would be $200.
Historical Context
Origin
T-bills were first issued by the U.S. government during World War I as a way to finance the war effort. Since then, they have become a primary tool for managing the federal government’s short-term funding needs.
Comparisons
Treasury Bills vs. Treasury Bonds
- Maturity: T-bills have a maturity of one year or less, while Treasury Bonds (T-bonds) have maturities of 20 years or more.
- Interest Payments: T-bills do not pay periodic interest; T-bonds pay semi-annual interest.
Related Terms
- Treasury Notes (T-notes): Government debt securities with maturities ranging from one to ten years. T-notes pay semi-annual interest and are sold at, above, or below face value.
- Commercial Paper: Short-term, unsecured promissory notes issued by corporations, typically used for financing short-term liabilities.
FAQs
Are T-bills a good investment?
How can I buy T-bills?
References
- U.S. Department of the Treasury. (n.d.). Treasury Bills. Retrieved from treasurydirect.gov
- Federal Reserve Bank of St. Louis. (n.d.). Treasury Bills. Retrieved from stlouisfed.org
Summary
Treasury Bills (T-bills) are short-term government securities that offer a safe, liquid, and reliable investment option. With no coupon rate and sold at a discount, T-bills provide a straightforward way for investors to lend money to the U.S. government. They serve as an essential component of the government’s short-term financing mechanism and a crucial tool for investors looking to manage risk and liquidity in their portfolios.
