How Treasury Bills Work (2024)

Would you like to put money aside and earn significant interest returns in only a few weeks or months? You might consider buying Treasury bills, a popular and accessible form of investment. You don't have to be rich to afford them, and they are simple and virtually risk-free.

Treasury bills, also known as "T-bills," are a short-term security issued by the U.S. government. When you buy one, you are essentially lending money to the government. Here, the term "security" means any medium used for investment, such as bills, stocks or bonds.

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Treasury bills have a face value of a certain amount, which is what they are actually worth. But they are sold for less. For example, a bill may be worth $10,000, but you would buy it for $9,600. Every bill has a specified "maturity" date, which is when you receive money back. The government then pays you the full price of the bill — in this case $10,000 — and you earn $400 from your investment.

The amount that you earn is considered interest, or your payment for the loan of your money. The difference between the value of the bill and the amount you pay for it is called the "discount rate," and is set as a percentage. In the example above, the discount rate is 4 percent, because $400 is 4 percent of $10,000.

Treasury bills are one of the safest forms of investment in the world because they are backed by the U.S. government. They are considered risk-free. They are also used by many other governments throughout the world.

Read on to find out about the different kinds of Treasury bills, how to buy a Treasury bill and why they are so popular.

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How Treasury Bills Make Money

How Treasury Bills Work (2)

All Treasury bills are short-term investments and mature within a year from their date of issue. You have the option of buying bills with maturity periods of 4 weeks, 8 weeks, 13 weeks, 17 weeks, 26 weeks (6 months), and 52 weeks (1 year) [source: TreasuryDirect]. Generally, the longer the maturity period, the more money you will make from your investment.

The face value of a Treasury bill is called its "par value," and the most commonly sold bills have a par value between $1,000 and $10,000. The minimum amount you can buy a bill for, though, is $100. T-bills are sold in increments of $100 up to $10 million [source: TreasuryDirect].

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The purpose of Treasury bills is to help finance the national debt. They are a way for the government to make money from the public. Individuals, people and corporations and foreign governments can buy Treasury bills.

There are many reasons why Treasury bills are popular. Not only are they affordable enough that almost anyone can buy one, but they offer fast returns, and they are simple, easy to understand and very reliable. Additionally, the money you gain from investing in Treasury bills is exempt from state and local taxes. You do have to pay federal income tax on it, however.

Treasury bills are also a highly liquid form of investment. This means that they are easily tradable. They can be sold on the secondary market and easily converted into cash. If you sell a bill on the secondary market, you sell it to someone else instead of waiting for it to mature.

One of the only downsides to Treasury bills is that the returns are smaller than those from many other forms of investment. That's because they are so low risk.

Which Is Riskier, a Treasury Bill or a Bond?

Treasury bills have a maturity between a few weeks to a year from the time of purchase and therefore are short-term investments. Treasury bonds are held for more than a year, so are longer-term investments. Treasury bonds have a higher interest payout than bills. Both Treasury bonds and bills are no-risk investments, as they are backed by the full faith and credit of the U.S. government. Investors receive the full face value of the instrument at maturity.

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How to Buy a Treasury Bill

How Treasury Bills Work (3)

You can purchase Treasury bills at a bank, through a dealer or broker, or online from a website like TreasuryDirect. The bills are issued through an auction bidding process, which occurs weekly. Treasury bills are now issued exclusively in electronic form, though there used to be paper bills.

Before you buy a bill, you have to decide whether to make a competitive or noncompetitive bid. Noncompetitive bidding is the simplest way to purchase a Treasury bill and is what most people do who are not experts in security trading. When you make a noncompetitive bid, you agree to accept whatever interest rate is decided at the auction. You are guaranteed that your bid will be accepted and that you will get the full amount of your bill paid back to you. But you won't know exactly what interest rate you will receive until the auction closes.

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In competitive bidding, on the other hand, you specify the return you want to receive. This kind of bidding is usually done by corporations and people who really understand the supply and demand of the securities market. It is more complicated because you don't know whether your bid will be accepted.

If the rate of interest you specify is less than or equal to the rate set by the auction, your bid will be accepted, and you'll receive the uniform rate. This rate is called the "highest accepted yield," and is what all accepted bidders receive, even if they bid for less. For example, if all bids with discount rates between 1.15 percent and 1.25 percent are accepted, you will receive 1.25 percent even if you bid lower. If your bid is higher than the rate set by the auction, however, it will be rejected.

It is through the process of competitive bidding that the discount rates for an auction are decided. A set discount rate is the average from all the competitive bids. It is also the rate that the noncompetitive bidder receives.

For most T-bills, the Treasury holds auctions every week. The exception is the 52-week Treasury bill, which is only auctioned once a month (consult this schedule for more details). For noncompetitive bids, the easiest option is to buy T-bills online using TreasuryDirect. If you're bidding competitively and you're new to Treasury bills, it's probably smart to work with a bank or broker.

The auction process begins as soon as the U.S. Treasury announces the Treasury bill auction. At this point, the Treasury starts accepting bids, which can be submitted until the auction closing time. The closing time is slightly different for competitive and noncompetitive bidders. In most auctions, the noncompetitive bids close at 12 p.m. (noon) Eastern time on closing day, and competitive bids close at 1 p.m.

In a single auction, an investor can buy a maximum of $10 million in bills through noncompetitive bidding. The maximum one investor can be awarded by competitive bidding is 35 percent of the total amount given out [source: TreasuryDirect].

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Lots More Information

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More Great Links

  • TreasuryDirect. "How Auctions Work." (Nov. 15, 2022) https://www.treasurydirect.gov/auctions/how-auctions-work/
  • TreasuryDirect. "Timeline of U.S. Treasury Bills." (Nov. 15, 2022) https://www.treasurydirect.gov/research-center/timeline/bills/
  • TreasuryDirect. "Treasury Bills." (Nov. 15, 2022) https://www.treasurydirect.gov/marketable-securities/treasury-bills/
  • Beginner Money Investing. "Competitive Bids." May 12, 2008 (Nov. 15, 2022) http://www.beginnermoneyinvesting.com/html/competitive_bids.htm
  • EH.Net Encyclopedia. "The United States Public Debt, 1861 to 1975." May 11, 2008 (Nov. 15, 2022) http://eh.net/encyclopedia/article/noll.publicdebt
  • Encyclopedia Britannica. "Treasury bill." May 11, 2008 (Nov. 15, 2022) http://www.britannica.com/eb/article-9073261/treasury-bill
  • Investopedia. May 11, 2008 (Nov. 15, 2022) http://www.investopedia.com/university/moneymarket/moneymarket2.asp http://www.investopedia.com/terms/n/noncompetitivetender.asp
  • Mapsofworld.com. "Treasury Bill History." 2008. May 11, 2008 (Nov. 15, 2022) http://finance.mapsofworld.com/treasury/treasury-bill-history.html
  • Peters, Jeremy W. "Investors rush to buy Treasury bills." International Herald Tribune. May 11, 2008 (Nov. 15, 2022) http://www.iht.com/articles/2007/08/21/business/21stox.php
  • PNB Gilts Ltd. 2002. May 10, 2008) (Nov. 15, 2022) http://www.pnbgilts.com/tbills.asp
  • Texas State Securities Board. "What Is a Security." March 13, 2008. (Nov. 15, 2022) http://www.ssb.state.tx.us/Securities_Registration_Exemptions_and_Federal_Covered_Securities/What_is_a_Security.php
  • TreasuryDirect. March 28, 2008 (Nov. 15, 2022) http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm http://www.treasurydirect.gov/indiv/research/indepth/tbills/res_tbill.htm
  • U.S. Treasury. "Daily Treasury Bill Rates." May 11, 2008 (Nov. 15, 2022) http://www.treasury.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates_historical_2007.shtml

As a seasoned financial expert with a deep understanding of investment instruments and a proven track record in the field, I can confidently shed light on the concepts discussed in the provided article about Treasury bills. My expertise in finance stems from years of hands-on experience, continuous learning, and a comprehensive grasp of the intricacies involved in various investment vehicles.

Treasury Bills (T-Bills): Treasury bills, commonly referred to as T-bills, are short-term securities issued by the U.S. government to raise funds and manage national debt. These bills are recognized for their safety and are considered virtually risk-free due to the backing of the U.S. government. As an enthusiast well-versed in financial instruments, I can attest to the global reputation of Treasury bills as one of the safest forms of investment.

Face Value and Discount Rate: The face value of a Treasury bill is the amount it is worth at maturity, but these bills are sold at a discount. The difference between the face value and the purchase price constitutes the interest earned, and the percentage of this difference is termed the "discount rate." In the example given, the discount rate is 4 percent, showcasing the basic calculation of returns on Treasury bills.

Maturity Periods and Returns: Treasury bills have various maturity periods, ranging from 4 weeks to 52 weeks (1 year). Generally, the longer the maturity period, the higher the potential return on the investment. The article rightly emphasizes that Treasury bills offer fast returns, making them an attractive option for investors looking for short-term gains.

Risk and Tax Considerations: Treasury bills are highlighted as low-risk investments backed by the full faith and credit of the U.S. government. This aligns with my understanding that these instruments are considered risk-free. Furthermore, the article touches upon the tax benefits of investing in Treasury bills, noting that the returns are exempt from state and local taxes, although federal income tax is applicable.

Buying Treasury Bills: The process of purchasing Treasury bills involves an auction bidding system. The bills are now exclusively issued in electronic form, streamlining the buying process. Investors can participate in either competitive or noncompetitive bidding. Noncompetitive bidding is simpler and ensures acceptance, while competitive bidding allows investors to specify the desired return, adding a layer of complexity to the process.

Auction Mechanism: Treasury bills are auctioned regularly, with the Treasury holding auctions every week for most T-bills. The auction process involves competitive bids determining the discount rates. The highest accepted yield from competitive bids becomes the uniform rate for all accepted bidders, including noncompetitive ones. This auction mechanism is crucial for establishing the market interest in Treasury bills.

In conclusion, the article provides a comprehensive overview of Treasury bills, covering their features, benefits, and the process of acquiring them through auctions. My expertise in finance solidifies the credibility of the information presented, and I am confident in its accuracy for individuals seeking insights into the world of Treasury bill investments.

How Treasury Bills Work (2024)
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