A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by theTreasury Departmentwith a maturity of one year or less. Treasury bills are usually sold indenominationsof $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.
The U.S. government issues T-bills to fund various public projects, such as the construction of schools and highways. When an investor purchases a T-Bill, the U.S. government is effectively writing an IOU to the investor. T-bills are considered a safe and conservative investment since the U.S. government backs them.
T-bills are issued at adiscountfrom thepar value(also known as theface value) of the bill, meaning the purchase price is less than the face value of the bill. For example, a $1,000 bill might cost the investor $950 to buy the product.
When the bill matures, the investor is paid the face value—par value—of the bill they bought. If the face value amount is greater than the purchase price, the difference is the interest earned for the investor.T-bills do not pay regular interest payments as with a coupon bond, but a T-Bill does include interest,reflected in the amount it pays when it matures.
Advantages and Disadvantages of T-Bills
Treasury Bills are one of the safest investments available to the investor. But this safety can come at a cost. T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates are rising, existing T-bills fall out of favor since their rates are less attractive compared to the overall market. As a result, T-bills haveinterest rate riskmeaning there is a risk that existing bondholders might lose out on higher rates in the future.
Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit. Since Treasury bills don't pay periodic interest payments, they're sold at a discounted price to the face value of the bond. The gain is realized when the bond matures, which is the difference between the purchase price and the face value.
However, if they're sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. In other words, if sold early, the sale price of the T-bill could be lower than the original purchase price.
Pros and Cons of T-Bills
Pros
- Zero default risk since T-bills have a U.S. government guarantee
- Interest income is exempt from state and local income taxes but subject to federal income taxes
- Investors can buy and sell T-bills with ease in the secondary bond market
Cons
- T-Bills may offer low returns compared with other debt instruments as well as when compared to certificates of deposits (CDs)
- The T-Bill pays no coupon — interest payments — leading up to its maturity
- T-bills can inhibit cash flow for investors who require steady income
- T-bills have interest rate risk, so, their rate could become less attractive in a rising-rate environment
What Influences T-Bill Prices?
T-Bill prices fluctuate similarly to otherdebt securities. Many factors can influence T-Bill prices, includingmacroeconomicconditions, monetary policy, and the overall supply and demand for Treasuries.
What Kind of Interest Payments Will I Receive If I Own a Treasury Bill?
The only interest paid will be when the bill matures. At that time, you are given the full face value. T-bills arezero-coupon bondsthat are usually sold at a discount and the difference between the purchase price and the par amount is your accrued interest.
If you're not sure if a T-bill is right for you or need help purchasing, please contact an advisor at Forward Investment Services.
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FAQs
U.S. Treasury Bills (T-Bills, Bills) are a type of short-term Treasury marketable security of one year or less, typically sold at a discount. Treasury calculates auction results to the sixth decimal place.
What you need to know about Treasury bills? ›
Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.
What is the downside of buying T-bills? ›
The Potential Downside
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts.
How much does a $1000 T-bill cost? ›
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
Why would anyone bother investing in Treasury bills? ›
Investors who want safety and tax savings might opt for Treasury securities and municipal bonds, which are issued by local state governments. Corporate bonds can provide a higher return or yield, but the financial viability of the issuer should be considered.
Do you pay capital gains on Treasury bills? ›
Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.
Should I put money in Treasury bills? ›
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.
Is it possible to lose money on Treasury bills? ›
Treasury bonds, notes, and bills have no default risk since the U.S. government guarantees them. Investors will receive the bond's face value if they hold it to maturity. However, if sold before maturity, your gain or loss depends on the difference between the initial price and what you sold the Treasury for.
Which is better, a CD or a treasury bill? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
What happens when a T-bill matures? ›
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)
How often do T-bills pay interest? ›
It pays interest twice a year and face value at maturity. The money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year. Federally guaranteed obligations are debt securities issued by the United States government that are considered risk-free.
Can I buy a T-bill at a bank? ›
You can buy (bid for) Treasury marketable securities through: your TreasuryDirect account — non-competitive bids only. a bank, broker, or dealer — competitive and non-competitive bids.
What is the downside of T-bill? ›
As a result, T-bills have interest rate risk meaning there is a risk that existing bondholders might lose out on higher rates in the future. Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit.
What is better than T-bills? ›
Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.
How to ladder T-bills? ›
You need to purchase several T-Bills with staggered maturity dates. You can buy & build a T-bill ladder through most brokerage firms or through treasurydirect.gov. You can also set up an automatic laddering system on the US Treasury website so you won't have to worry about micromanaging your investments.
How much do you make on a 3 month T-bill? ›
3 Month Treasury Bill Rate is at 5.25%, compared to 5.25% the previous market day and 5.13% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.
What happens to a T-bill when it matures? ›
Treasury bills (T-bills) are short-term Singapore Government Securities (SGS) issued at a discount to their face value. Investors receive the full face value at maturity.
What is a 1 year T-bill paying today? ›
1 Year Treasury Rate is at 5.14%, compared to 5.13% the previous market day and 5.02% last year. This is higher than the long term average of 2.95%. The 1 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 1 year.
How much will I make on a 4 week Treasury bill? ›
4 Week Treasury Bill Rate is at 5.28%, compared to 5.28% the previous market day and 4.32% last year. This is higher than the long term average of 1.41%. The 4 Week Treasury Bill Rate is the yield received for investing in a US government issued treasury bill that has a maturity of 4 weeks.
