Published Sep 8, 2024 A Treasury bill, often abbreviated as T-bill, is a short-term government debt security with a maturity of one year or less. It is issued by the U.S. Department of the Treasury to help finance the operations of the federal government. Treasury bills are sold at a discount from their face value, and the difference between the purchase price and the face value at maturity represents the interest income to the investor. To understand how Treasury bills work, imagine you decide to purchase a T-bill with a face value of $1,000. The U.S. Treasury auctions this bill and you manage to buy it at a discount price of $950. Upon maturity in one year, the Treasury redeems the bill at its face value of $1,000. The $50 difference between what you paid ($950) and what you receive at maturity ($1,000) is your interest income. Since T-bills have short maturities, they are often considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. Investors including individuals, financial institutions, and foreign governments frequently buy T-bills as part of their investment portfolio for their safety and liquidity. Treasury bills are important for several reasons: Treasury bills, Treasury bonds, and Treasury notes are all types of U.S. government securities, but they differ primarily in their maturity periods: All three types of securities are considered safe investments, but they cater to different investment strategies based on the investor’s time horizon and income needs. Interest income earned from Treasury bills is exempt from state and local taxes, but it is subject to federal income tax. The interest income is recognized as the difference between the purchase price and the face value upon maturity. Investors will receive a Form 1099-INT from the U.S. Treasury, reporting the interest income for tax purposes. Yes, individual investors can purchase Treasury bills directly from the U.S. government through the TreasuryDirect website. This platform allows investors to participate in the regular auctions conducted by the Treasury. Investors can also buy T-bills in the secondary market through brokers, banks, or other financial institutions. The interest rates or yields on Treasury bills are determined through an auction process. During these auctions, investors submit bids that specify the discount rate they are willing to accept. The Treasury accepts the competitive and non-competitive bids starting with the lowest yield and moving up until they have issued the required amount of securities. The highest accepted yield is referred to as the “stop-out” rate. Investors who submit non-competitive bids agree to accept the yield determined by the auction. Treasury bills can be suitable for a wide range of investors, particularly those looking for low-risk, short-term investment options. They are ideal for conservative investors, retirees, or those who need to preserve capital while earning a small return. However, they may not be the best fit for investors seeking higher returns or those willing to assume more risk for potential higher rewards. Investors should consider their financial goals, risk tolerance, and investment horizon when deciding if T-bills are suitable for their portfolio.Definition of Treasury Bill
Example
Why Treasury Bills Matter
Frequently Asked Questions (FAQ)
How do Treasury bills differ from Treasury bonds and Treasury notes?
What are the tax implications of investing in Treasury bills?
Can individual investors purchase Treasury bills directly from the government?
How are the interest rates on Treasury bills determined?
Are Treasury bills suitable for all types of investors?
Economics