Treasury Bills
Treasury Bills (T-Bills) are short-term debt securities issued by the U.S. government to finance its operations. They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. Unlike other securities, T-bills do not pay periodic interest (or "coupon payments"). Instead, they are sold at a discount to their face value, and when they mature, the investor is paid the full face value, making the difference the interest earned.
Treasury Bills (T-Bills) are short-term debt securities issued by the U.S. government to finance its operations. They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. Unlike other securities, T-bills do not pay periodic interest (or "coupon payments"). Instead, they are sold at a discount to their face value, and when they mature, the investor is paid the full face value, making the difference the interest earned.
How Treasury Bills Work:
Discounted Purchase: T-bills are sold at a price lower than their face value (e.g., buying a $1,000 T-bill for $970). The difference between the purchase price and the face value is the investor's profit or "interest."
Maturity: T-bills have short maturities, typically 4 weeks, 8 weeks, 13 weeks, 26 weeks, or 52 weeks. Upon maturity, the investor receives the full face value.
No Regular Interest Payments: Unlike bonds, T-bills don’t pay interest regularly. Instead, the interest is the difference between the purchase price and the face value.
Example:
Suppose you purchase a 13-week Treasury bill with a face value of $1,000 for $980. After 13 weeks (about 3 months), when the T-bill matures, you receive $1,000 from the U.S. government. The $20 difference ($1,000 - $980) is the interest you earned, representing the return on your investment.
Key Features of T-Bills:
Risk-Free: T-bills are virtually risk-free because they are backed by the U.S. government. There's no default risk, making them one of the safest investments.
Highly Liquid: T-bills are easy to buy and sell in secondary markets, making them highly liquid investments.
Short Maturity: Since T-bills mature within a year, they provide a quick turnaround for investors who need to access their funds.
Tax Treatment: Interest earned on T-bills is exempt from state and local taxes but subject to federal income tax.