Definition
Treasury Bill (T-Bill) is a short-term debt instrument issued by the U.S. Treasury with a maturity period of up to one year. Unlike Treasury bonds and Treasury notes, which have longer maturity periods, T-Bills are designed to meet immediate funding needs of the U.S. government. T-Bills are sold at a discount to their face value, enabling the government to borrow funds without paying periodic interest. Instead, an investor earns interest income by receiving the full face value at maturity.
Key Features
- Issuance: U.S. Treasury
- Maturity Period: Up to 1 year
- Interest Payment: At maturity, as the difference between purchase price and face value
- Denominations: Commonly in multiples of $1,000
- Type: Discount security
Function and Usage
T-Bills are used by the government to raise short-term funds and are considered one of the safest investment vehicles due to the backing of the U.S. government. They are a popular choice for investors looking to preserve capital with minimal risk.
Examples
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Example 1: An investor purchases a $10,000 Treasury Bill at a price of $9,800. Upon maturity, the investor receives the face value of $10,000. The interest income earned by the investor is $200.
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Example 2: A corporation looking to park excess cash buys Treasury Bills worth $5 million. They achieve a short-term investment yielding a predetermined amount upon maturity with negligible credit risk.
Frequently Asked Questions (FAQs)
1. How are Treasury Bills sold?
T-Bills are sold through auctions conducted by the U.S. Treasury. They can be purchased directly from TreasuryDirect or through banks and brokers.
2. Are T-Bills a good investment for individuals?
T-Bills are considered very safe as they are backed by the U.S. government. They are suitable for conservative investors looking for a secure, short-term investment option.
3. What is the minimum purchase amount of a T-Bill?
The minimum purchase amount for a T-Bill is $100.
4. Is the interest income from T-Bills taxable?
Interest income from T-Bills is exempt from state and local taxes but subject to federal taxes.
5. Can T-Bills be sold before maturity?
Yes, T-Bills can be sold in the secondary market before maturity, though their liquidity and price may vary.
Related Terms
- Treasury Note (T-Note): Intermediate maturity government securities ranging from 1 to 10 years.
- Treasury Bond (T-Bond): Long-term government securities with maturities longer than 10 years.
- Discount Security: A security sold below its face value and redeemed at maturity for full face value.
- Yield: The earnings generated and realized on an investment, expressed as a percentage.
Online Resources
- TreasuryDirect: https://www.treasurydirect.gov
- Investopedia - Treasury Bills (T-Bills): https://www.investopedia.com/terms/t/treasurybill.asp
- U.S. Department of the Treasury: https://home.treasury.gov
Suggested Books for Further Studies
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
- “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
- “Fixed Income Analysis” by Barbara S. Petitt and Jerald E. Pinto
Fundamentals of Treasury Bills (T-Bills): Finance Basics Quiz
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