Akash Jha
What Is a T-Bill?
The United States Department of the Treasury issues debt obligations known as Treasury Bills or T-Bills. The T-Bill is the United States Treasury’s short-term debt instrument, maturing anywhere from a few days to one year. Par value (sometimes referred to as face value) is the price at which T-Bills are sold to the buyer. You will be paid face value (or par) when the bill matures. Your interest is calculated as the difference between the purchase price and the par value.
T-Bills can be purchased in denominations of $100 with a maturity value of the same amount. These bonds are similar to zero-coupon bonds in that they are issued at a discount and mature at par, with the interest paid to the investor being the difference between the purchase price and par. There is a wide range of maturities available for T-Bills, from four to fifty-two weeks. Except for the 52-week Treasury Bill, which is offered every four weeks, auctions with varied maturities take place every week.
A 26-week T-Bill, for instance, might be purchased at par each week for $999.86, eventually maturing at $1,000. The price cut is established during the bidding process.
KEY POINTS
- Treasury bills are short-term unsecured debt instruments issued by the United States Treasury.
- The maturity date of T-bills is the shortest of any federal government debt instrument.
- T-bills are available for purchase in both non-competitive and competitive $100 increments.
- Federal taxes, but not municipal or state taxes, apply to T-bills.
- Compared to other safe assets like CDs, the return on T-bills is rather low.
T-Bills vs. Treasury Bonds vs. Treasury Notes
The maturity date is the main determining factor between a T-Bill, a Treasury Bond, and a Treasury Note. The Treasury Bond’s longest maturity is 30 years, and even longer maturities of 50 and 100 years are being considered.
This Treasury Note will maturity in two to ten years.The T-Bill has a maturity of one year or less.The U.S. Treasury issues debt to raise funds, and holders are certain of receiving their original investment plus interest payments regardless of fluctuations in bond or stock markets.
How to Bid for T-Bills
Investors can submit two different types of bids for T-Bills:
- Non-competitive bids–A market order is quite similar to this form of bid. The investor consents to the auction’s determination of the discount rate. If investors accept this offer, their orders will be fulfilled without fail. TreasuryDirect, your bank, or your broker are all great places to place a noncompetitive bid.
- Competitive bids- The investor offers a discount rate that they are willing to accept in their bid. Your order will be fulfilled if and only if your bid is higher than the auction’s discount rate. If this isn’t done, we may have to reject or just fulfill a portion of your order. Treasury Direct is unable to accept this kind of bid at this time. You need the services of a financial institution or broker.
In a single auction, investors can purchase up to $10 million in T-Bills through noncompetitive bidding, or 35 percent of the offering sum through competitive bidding.
Tax Treatment and Yields
T-bill interest is taxable at the federal level but exempt at the state and local levels. T-bills are therefore appealing to investors in states with high tax rates. There is an option for investors to have up to 50 percent of the interest paid on their invoices withheld for tax purposes.
In general, the yields on T-Bills are marginally lower than those on comparable investments such as certificates of deposit (CDs). This is due to their perception of safety resulting from the government’s interest and principal guarantee. Obviously, the yield on a T-Bill increases as its maturity date approaches.
Investing With T-Bills
Investors with limited time frames can optimize returns while minimizing risk by employing a laddering technique. This idea makes it possible to periodically receive sums of money that can be re-invested at the current market rate.
Another option is to invest mostly in safe instruments like T-Bills and only a tiny portion in riskier investments like derivatives that could gain a lot if the markets turn.
If markets reverse course, however, the value of the T-Bills will increase to the original principal when they mature. Alternatively, depending on the portfolio’s T-Bill to risky asset ratio, they may need to be reinvested one or more times.
You can purchase previously issued T-bills on the secondary market through a broker.
Safety and Risks
T-Bills are commonly used as the “safety net” of an investment portfolio due to its primary feature, the promise of a full return of principle. Investors who are savvy enough to realize that these securities provide a greater interest rate than cash instruments or accounts like money market funds will often employ them instead of cash.
Because of this, they are also appealing to institutions subject to fiduciary laws that forbid them to expose their clients’ money to any kind of risk. Nevertheless, T-Bills are still vulnerable to inflation risk and interest-rate risk, so long-term investors who want to beat the market should probably look elsewhere objectives.
Also read:- Debenture vs. Bond: What’s the Difference?
The Bottom Line
Conservative investors who want more return on their money than they can get from a money market fund or savings account might consider purchasing T-Bills. Despite the fact that T-Bills rarely provide actual inflation-adjusted returns, they do provide liquidity, principal protection, and tax-free status.
