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What is a Treasury Bill?

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  • Written By: Amy Hunter
  • Edited By: Lucy Oppenheimer
  • Last Modified Date: 09 November 2016
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A treasury bill, or t-bill, is a short term investment with maturity dates ranging from four to 52 weeks. These investments are often considered quite safe because they are backed by the United States government.

A treasury bill differs from other types of investments in that they do not pay interest in the traditional way. When an investor wishes to purchase a treasury bill, they buy buy it at a discount rate. The amount paid for the treasury bill varies, and is decided by a bidding process. Once the treasury bill is purchased, the owner does not receive any money until the t-bill matures at which time he or she will receive the face value of the t-bill. This difference, the discount rate and the face value rate, is said to be the "interest" of a t-bill. Another benefit of the t-bill, is that when you purchase one, you know exactly how much you will earn over the life of the investment.

For example, if the investor buys a treasury bill with a face value of $10,000 USD (US Dollars), for the price of $9,500 USD, he will receive $10,000 when the t-bill matures, earning $500 USD in the process. T-bills are available in a variety of denominations, from $10,000 to one million USD.

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Treasury bills are purchased through either a competitive or noncompetitive bid. In the competitive bidding process, the investor decides what discount rate they will accept, though they are not guaranteed to receive this rate. In fact, they may end up with no t-bill at all, or with one in a different amount than they were initially interested in. Competitive bidding is handled through brokers, banks or other investment dealers. In noncompetitive bidding, the investor agrees to accept the discount rate that is determined at auction. The investor is guaranteed the t-bill in the amount they want, but may not receive as high of a discount as the competitive bidder. Noncompetitive bidders can purchase a treasury bill through banks, brokers and other dealers as well as directly from the US Treasury Department.

Regardless of whether you choose to purchase a treasury bill through the competitive or noncompetitive bidding process, do not expect to receive a piece of paper to prove ownership. T-bills are held electronically, and any remaining paper t-bills have reached maturity.

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everetra
Post 7

@hamje32 - If you want to buy treasury bills you can find information online, and even a website that is a complete clearinghouse of all things treasury investments related.

You can buy treasury bills or treasury bonds or savings bonds, whatever you want, and get the breakdown on interest rates and clear explanations on the difference between the various investments.

I do recommend some treasury investments to balance your portfolio, and I am an optimist who believes that the government will never default.

We bought savings bonds for our son when he was born last year. They will mature in 20 years. We’re hoping that they will help him to pay for college costs, as expensive as they are.

NathanG
Post 6

@hamje32 - You are describing treasury bonds not treasury bills. There is a difference. Treasury bonds are issued for 30 years, and you get an interest payment every six months.

Treasury bills are short term and their so-called interest rate is the difference between the discount rate (what you pay) and the par value, what they pay at maturity. Treasury bills can’t be taken out for more than 52 weeks from what I understand.

I think treasury bonds are better. I like getting an interest rate biannually, much as I prefer investing in stocks that pay dividends, and I think that treasury bonds pay better than treasury bill rates.

hamje32
Post 5

Treasury bonds are typically secure investments and are usually a good choice for conservative investment options. I say typically secure, because they are backed by the federal government.

If in a nightmare scenario the government is unable to pay its debts, it is quite possible that the government will not be able to make good on its treasury bill payments. As I said, this is the nightmare scenario and has never happened-nor do I expect that it ever will.

anon159816
Post 3

What are the uses of t-bills? It seems like an unnecessarily complicated vehicle/transaction/investment.

anon147877
Post 2

no, it does not.

anon40351
Post 1

does a t-bill continue to earn after maturity?

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