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Treasury bills (T-Bills) are short-term debt securities that a government uses to raise money and sell at a discount and are repaid at their face value at the maturity date.
But how do you consider trading vs investing options and end up choosing to make money from an investment that does not pay any coupon or interest?
This article describes everything a beginner should know about treasury bills. We will discuss their meaning, various maturities, the mechanics of the auctions, and the math behind their yield.
We will also examine the overall process of purchasing T-Bills, the advantages and disadvantages of the same, and how they compare to other financial instruments. Let’s dive in.
Quick Answer (Definition Box)
Treasury bills, or T-Bills, are short-term government debt obligations sold at a discount to the face value and have a maturity period not exceeding one year. The treasury bills meaning is based on this discount.
Investors profit when they purchase the T-Bill at a lower price than the face value (the par) and gain the entire face value at the maturity of the bill. They are said to be low-risk and very liquid.
What Are Treasury Bills and Why Governments Issue Them?
Treasury bills are issued by governments to finance their current short-term cash flow requirements and to control the country’s liquidity. And so, what are treasury bills practically?
Consider them as governmental IOUs. A government that requires paying its public services or other expenses but which does not have the cash at hand auctions T-Bills to borrow funds over the short run.
These instruments form the primary sector of the money market. The most essential characteristics of treasury bills are:
- Sovereign Issuer: Guaranteed by the full faith and credit of the national government.
- Zero-Coupon: They do not pay regular interest. The difference between the face value and the discount price (purchase price) is the return.
- Fixed Maturity: These have an end date (such as 91 days, 52 weeks).
- High Liquidity: The secondary market is usually active, that is, it can be sold before expiry. The Bank for International Settlements’ 2024 quarterly review noted that government T-Bills maintain relatively tight bid-ask spreads even during market volatility.
How T-Bills Work (Step-by-Step)
A T-Bill operates where an investor lends money to the government at a discount and receives the entire face value when the T-Bill matures. It takes place in the following steps:
- Auction Announced: The government (through its treasury or central bank) declares that it will auction T-Bills of a certain maturity.
- Bids Submitted: Investors submit the bids indicating the amount they desire (non-competitive) or the exact price/yield to which they are prepared to accept (competitive).
- Price Determined: The price at which the auction will be accepted to sell the announced quantity is the lowest price or the highest yield, which is identified as the stop-out price.
- Allotment: T-Bills are allotted to winning bidders.
- Settlement: At the settlement date, the investor remits the discount price, and the T-Bill is credited to their account.
- Maturity: The investor may keep the T-Bill until it matures and automatically receive the full face value (or par value).
- Secondary Market: The investor can also sell the T-Bill to another investor in the secondary market before maturing.
Types & Maturities
The various treasury bills are distinguished by the maturity date, which usually takes from a few weeks to one year.
The maturity of the t-bills in use depends on the country. These various classes of treasury bills assist the government in its funding plan and provide flexibility to the investors.
For example:
- In India: T-Bills are usually auctioned by the Reserve Bank of India (RBI) over 91 days, 182 days, and 364 days.
- In the US: The U.S. Treasury issues bills with a maturity of 4, 8, 13, 17, 26, and 52 weeks.
These are issued on a periodic, rotating basis by governments. Other investors employ a laddering technique, purchasing T-Bills with varying maturities in such a way that they reach maturity at different times, giving them a consistent cash flow.
Treasury Bill Auctions & Pricing
T-Bills are auctioned and sold in a regular treasury bill auction in which investors submit bids. Bidding in an auction can happen in two significant ways:
- Non-competitive bidding: It is the most straightforward approach, used mainly by individual investors. You are willing to obtain the yield/price the auction has set and ensure you get the requested T-Bills (in a limited amount).
- Competitive bidding: Big institutions usually employ this. Bidders give the specific yield (or price) that they can accept. Their offer is accepted if it does not exceed the cut-off/stop-out yield determined by the auction.
The cut-off yield will be the maximum yield that is to be paid by the government in that auction.
All non-competitive bidders receive this yield. When payment and securities are involved, settlement typically occurs a few days following the auction.
Treasury Bill Yield: Formula and Example
Treasury bill yield is a measure of the reward an investor will gain by buying a bill at a discount and receiving face value upon maturity.
Since T-Bills do not pay regular interest, they do not calculate yield like a normal bond. There are two widespread approaches, which have slightly different conventions.
Bank Discount Rate (BDR)
The Bank Discount rate will be computed based on a 360-day year, and the yield will be expressed as a percentage of the face value:
- Formula: (Face Value-Purchase Price)/ Face Value × (360/Days to Maturity).
This approach applies in the case of money markets, but it somewhat understates the actual return, since face value is used in the denominator instead of the actual investment value.
Investment Yield (Bond Equivalent Yield)
Investment Yield or Bond Equivalent Yield uses a 365-day year, and calculates the return based on the actual purchase price:
- Formula: (Face Value – Purchase Price)/Purchase Price/ (365/Days to Maturity).
The approach gives a more precise comparison with other fixed-income investments that provide returns in terms of capital invested.
Worked Example
Let us compute both the yields of a standard treasury bill:
Table A: T-Bill Yield Calculation Example
| Parameter | Value |
| Face Value | 100 |
| Purchase Price | 98.9 |
| Days to Maturity | 182 |
| Discount (Face − Price) | 1.1 |
Bank Discount Rate Calculation:
- (100 − 98.90) / 100 × (360 / 182)
- = 1.10 / 100 × 1.978
- = 0.011 × 1.978
- = 2.176% (annualized)
Investment Yield Calculation:
- (100 − 98.90) / 98.90 × (365 / 182)
- = 1.10 / 98.90 × 2.005
- = 0.01112 × 2.005
- = 2.230% (annualized)
Note that Investment Yield is slightly larger since it is calculated on the invested value (98.90) and not the face value (100). T-Bills, when compared with other investments, may be better than the Investment Yield.
Knowledge of both conventions is practical in translating quotes on various markets and platforms to the investor.
There are countries and systems of trade that default on one another, and thus, understanding how to convert between them will provide a proper assessment.
Treasury Bills: Benefits and Risks
The main advantages of T-Bills are high liquidity and safety, whereas low returns and reinvestment risk are their main threats. In evaluating the pros and cons of treasury bills, it is vital to view both sides.
Benefits (Pros):
- Safety: Are treasury bills safe? They are usually viewed as one of the safest investments in the market since the full faith and credit of the issuing government secures them. The risk of default is very low.
- Liquidity: T-Bills are usually easy and fast to sell in the secondary market before they mature.
- Predictability: You are certain of the amount that you will get (the face value) and at what time (the maturity date).
- Short-Term: They have short maturities, which are good when you need to keep cash, which is short-term.
Risks (Cons):
- Low Return: Unlike high-yield bonds, they are considered safe and usually tend to provide lower returns than other risky investments, such as stocks or corporate bonds.
- Reinvestment Risk: When your T-Bill expires, you will be forced to reinvest your money at a lower rate since the rates will decline.
- Inflation Risk: The yield may not be sufficient to match the inflation, which implies that your buying power may drop.
How to Buy Treasury Bills (Step-by-Step Checklist)
To purchase a treasury bill, you usually require an account with a government treasury portal, a bank, or a broker involved in T-Bill auctions. The precise procedure of purchasing treasury bills varies by country; however, the following is a broad checklist:
- Open an Account: This can be a particular securities account (such as an Indian demat account), or a brokerage or bank account. Other governments provide direct purchase portals (e.g., TreasuryDirect in the US, RBI Retail Direct in India).
- Check Auction Schedule: Locate the official calendar of auctions of the treasury or central bank on its website.
- Select Bid Type: Select for a non-competitive bid (easier, as you are guaranteed to receive T-Bill at the yield of the auction) or a competitive bid (you set the price/yield, but do not always win).
- Place Your Bid: Submit your bid through your portal or broker before the auction ends.
- Fund the Purchase: You must ensure you have enough cash in account when the settlement date comes.
- Get Allotment: Once the auction is over, the T-Bills will be credited to your account.
- Hold or Sell: You may either hold the T-Bill till it matures or sell it at the secondary market.
There are platforms, such as the ones offered by STARTRADER that allow you access to different financial markets, but you must always ensure you review what any given platform offers.
Taxes & Liquidity Overview
The yield of T-Bills is generally taxable as interest income and though they are generally liquid, their saleability may be subject to market fluctuations. Are treasury bills taxable?
In most countries, yes. The gain (the difference between your purchase price and the face value) is normally considered as ordinary interest income and taxed in accordance with your local laws.
Tax regulations may differ substantially, thus, it is advisable to seek expert advice.
In terms of liquidity, T-Bills form the basis of the money market. A research note by the Securities Industry and Financial Markets Association (SIFMA) reports that the U.S.
The Treasury market is considered one of the most liquid in the world with T-Bills actively trading. Liquidity, however, may be reduced when the market is stressed to its limits.
Comparisons (Tables & Notes)
T-Bills do not have the same maturity, risk, and return structure as other fixed-income products. It is easier to understand treasury bills’ strengths and weaknesses by comparing them to other popular instruments.
Table 1: Bills and Government Bonds
| Feature | Treasury Bills (T-Bills) | Government Bonds (e.g., T-Bonds) |
| Maturity | Short-term (1 year or less) | Long-term (typically 10-30 years) |
| Coupon | Zero-coupon (issued at discount) | Pays regular interest (coupons) |
| Interest Rate Risk | Very low (due to short duration) | High (price is sensitive to rate changes) |
| Typical Use | Cash management, parking funds | Long-term investment, income generation |
This comparison brings out the fundamental distinction of short-term cash management and long-term investment, which also apply in the comparison.
Table 2: T-Bills and Certificate of Deposit (CD)
| Feature | Treasury Bills (T-Bills) | Certificate of Deposit (CD) |
| Issuer | National Government | Bank or Credit Union |
| Credit Risk | Extremely low (sovereign risk) | Low (often insured up to a limit) |
| Liquidity | High (active secondary market) | Low (penalties for early withdrawal) |
| How to Buy | Auction or secondary market | Directly from a bank |
Table 3: T-Bills vs. Commercial Paper
| Feature | Treasury Bills (T-Bills) | Commercial Paper (CP) |
| Issuer | National Government | Corporations |
| Credit Risk | Extremely low | Higher (depends on the company’s credit) |
| Purpose | Fund government operations | Fund short-term corporate payroll, inventory |
| Regulation | Highly regulated | Less regulated than T-Bills |
Country Modules (Localized Overviews)
T-Bills rules, maturities and buying procedures are individually determined by the treasury or central bank of each country. The execution is different, although the concepts are similar.
India Module
Regarding treasury bills in India, the government sells them through an auction by the Reserve Bank of India (RBI).
- Maturities: 91-day, 182-day, and 364-day bills are the most popular.
- How to Buy: Non-competitive bidding may be done via the RBI Retail Direct portal or by a retail investor via banks and brokers.
USA Module
In the case of treasury bills in the USA, they are issued by the U.S. Department of the Treasury with maturity of 4, 8, 13, 17, 26, and 52 weeks.
- How to Buy: T-Bills may be purchased by investors directly through the government as non-competitive via the TreasuryDirect site or via a bank or broker as non-competitive or competitively.
Records & Reporting
All T-Bill transactions should be well documented as far as accounting and taxation are concerned.
This contains your confirmations of bids, allotment advice, contract notes, statements of purchase and maturity (redemption).
Such documents will be necessary to calculate your return correctly and report any taxable income.
You can access year-end statements from most brokers and government portals, which summarize such data. Remember to record the maturity cash flow.
FAQs
Treasury Bills (T-Bills) are short-lived (less than 1 year) debt securities sold by a government. Their operation is through sale at a discount to face value and payment of the entire face value at maturity.
T-Bills are discounted, so you pay less than the face value. This discount is your own profit. The precise price is established during an auction.
The standard maturities depend on the country and usually are 4, 8, 13, 26, and 52 weeks (US) or 91, 182, and 364 days (India).
The annualized returns are the yield. It is determined by using the discount, price, and days to maturity. Two of the common types of formulas are the Bank Discount Rate and the Investment Yield.
Conclusion
Treasury bills are a building block of the financial system because they provide a low-risk means of handling short-term cash.
They offer governments a source of much-needed finance and offer investors a safe, liquid, and predictable tool.
Knowing the nature of T-Bill auctions, pricing, and yield can help people better understand whether such securities are appropriate to their financial profile.
The article is educational in nature and is not investment or tax advice. Every financial choice is risky, and knowing what to do before entering any market is essential.
The most up-to-date schedules and rules of an auction are always found on official treasury or central bank websites.
Disclaimer: No representation is given, warranty made or responsibility taken about the accuracy, timeliness or completeness of information sourced from third parties. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate having regard to your particular circumstances.
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