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What Is a Treasury Bill?

A Treasury Bill is a one-year or less U.S. federal loan guaranteed by the U.S. Treasury Department. These are generally sold at a lower price than their face value and these assets are commonly viewed as safe and low-risk securities.

Treasury Bills are sold by the Treasury Department in auctions that have both competitive and non-competitive bidding. Non-competitive offers have a price that is determined by averaging all competitive bids obtained.

Keep reading to learn more about Treasury Bills and how they work.

How Do Treasury Bills Work?

These bills are issued by the United States Government to finance various public activities. Longer maturity dates result in higher interest rates paid to the lender by the bill.

They are reliable investments because they are backed by the government and usually, they are kept until the maturity date. Investors may choose to profit from the investment before it matures by taking advantage of the interest rates.

The maturities range from a few days to 52 weeks, but the most frequently offered maturities last for 4, 8, 13, 26, and 52 weeks. The investor receives the face value of the security they purchased after the bill fully matures. 

The disparity between the face value and the selling price is the interest paid by the investor. A competitive bid establishes a price that is below the par value of the Treasury Bill, allowing you to choose the yield you want.

Investors are paid a yield depending on the median auction price of all bidders.

What Are Treasury Bill Rates?

The discount rate refers to the price you pay for the bill. The government pays the entire value of the bill as the shares mature.

Rather than paying periodic interest, Treasury Bills earn an implied interest due to it being sold at a discounted face value.

How Do You Calculate the Price of Treasury Bills?

You’ll need to know the number of days before maturity and the current interest rate to determine the price of the bill. Multiply the number of days before the Treasury Bill matures by the rate of interest.

Divide the result by 360 to account for the Treasury’s interest-rate estimates, which are based on a 360-day accounting year. Subtract the result from 100 to get the final total.

What Are Treasury Bills Used for? 

Treasury Bills are attractive to investors because they don’t force you to save your money for an extended period of time. They are short-term securities, meaning their maturity dates are shorter than those of bonds and notes.

An individual who purchases a Treasury Bill is essentially lending money to the government. The capital is then used by the U.S. Government to pay off loans and cover recurring expenses.

Treasury Bills are a highly liquid investment choice. This means they can be traded easily and quickly turned into cash by selling them on the secondary market.

While Treasury Bill’s are a lower risk investment option, remember that their yields are lower than those of many other investment options.

What Are Some Treasury Bill Tax Considerations?

State and local taxes are not applied on the income you earn from Treasury Bills. The interest charged is tax-free at the state and local levels.

Pros of Treasury Bills

Less Risky

Treasury Bills have little or no risk tied to them. With the guaranteed interest, you will undoubtedly get the money back and there is almost no chance of losing the initial investment.

Since these shares are backed by the government, you don’t have to be concerned with losing money on the transaction.

Easily Accessible

T-bills may be bought at a fraction of the cost of most investments. This makes them more available to those who do not have a large sum of money to spend.

A longer maturity period can produce a higher return, but even if you want a shorter term, you will still gain interest.

Market Fluctuations

Regardless of economic trends or market cycle volatility, the net returns produced by these bills remain constant during their lifetime.

Cons of Treasury Bills

Low Interest Rates

The interest rates charged on these bills are normally lower than those offered by most investment alternatives. With treasury bills, you usually will not generate a large yield because these investments are low-risk.

Short Life Cycle

Due to the short maturities, you may find yourself having to constantly make new investments. Because the life cycle and yields to maturity are on the shorter end, you will continuously have to reinvest the capital to continue growing your funds.

Remember, T-bills are considered short-term investments.

Where Can You Purchase Treasury Bills?

Treasury bills may be purchased at a bank, by a dealer or broker, or online. These bills are then distributed through a weekly auction bidding process.

You may also access T-bills through the government run website at TreasuryDirect.gov.

Treasury Bills Vs. Treasury Bonds

Government securities with a fixed interest rate that pays every 6 month and is guaranteed by the United States Treasury Department are known as Treasury Bonds. T-bonds have maturities of 20-30 years.

Both are guaranteed by the United States Government. The bonds are sold by the U.S. Treasury regularly on auction sites just like the T-bills.

During the auction, the price and yield of a bond are calculated. The interest charged on each of these securities is tax-free at the state and local levels.

The Treasury Bond market is also extremely liquid, and investors can easily turn bills to cash by using a broker.

A Financial Advisor Can Help You Invest In Securities

A Treasury Bill is a one-year or less U.S. federal loan guaranteed by the Treasury Department. These assets are commonly viewed as safe and low-risk securities.

They are reliable investments because they are backed by the government and are great because they can be traded easily and quickly turned into cash by selling them on the secondary market. Consider reaching out to financial advisors to help you invest in T-bills and build a financial strategy that can help you accomplish your goals.