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What is the Difference Between Treasury Bills and Treasury Bonds?

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  • Written By: J. Boland
  • Edited By: A. Joseph
  • Last Modified Date: 04 December 2016
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Treasury bills and treasury bonds are securities sold by the United States Department of the Treasury. There are two main differences between these types of issues. The first difference is that treasury bills have a maturity of less than one year, whereas treasury bonds have a maturity of more than 10 years. The second difference is that treasury bills do not have interest payments, and treasury bonds have semi-annual interest payments.

Both treasury bills and treasury bonds have well-defined maturity dates. Treasury bills represent about one-third of the U.S. government's outstanding debt and are issued weekly, with maturities of three months, six months and one year. Treasury bills are auctioned on Mondays, with the payment due by the following Thursday. Treasury bonds are issued four times per year — in February, May, August and October — with maturities of 15, 20 and 30 years.

Treasury bills are sold at a discount, and the profit is reflected solely in the difference between the face value and the discount price. The profit for purchasing a treasury bond is reflected in the difference between the face value and the discount price as well as the sum of the semi-annual interest coupon payments. Both treasury bills and treasury bonds are considered the safest possible investments that an investor can make because they are backed by the U.S. government. Their shorter term are why treasury bills are widely considered the less risky of the two.

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Treasury rates are calculated from treasury bills and treasury bonds, and they reflect the interest rates at which the U.S. government can buy US Dollars. An interesting correlation between treasury bills and treasury bonds is illustrated in the yield curve. The yield curve charts anticipated yields, or return on investment, over time and is calculated using a process known as the bootstrap method, which calculates the zero rate for a range of securities.

As one would expect, the return on an investment is typically higher when money is invested for a longer period. In this normal situation, the chart slopes upwards, with lower yields in the short term — three months to one year — and higher yields in the long term — five to 30 years. In rare moments of economic crisis, the yield curve is inverted, which is an occurrence known as backwardation. In this situation, it is considered more risky to hold long-term securities.

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