Loading the player...

What is a 'Treasury Bill - T-Bill'

A Treasury bill (T-Bill) is a short-term debt obligation backed by the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to a maximum purchase of $5 million. T-bills have various maturities and are issued at a discount from par. When an investor purchases a T-Bill, the U.S. government writes an IOU; investors do not receive regular payments as with a coupon bond, but a T-Bill pays an interest rate.

BREAKING DOWN 'Treasury Bill - T-Bill'

T-Bills are attractive to investors because they offer a very low-risk way to earn a guaranteed return on invested money. They benefit the U.S. government because the government uses the money raised from selling T-bills to fund various public projects, such as the construction of schools and highways. T-bills can have maturities of just a few days up to the maximum of 52-weeks, but common maturities are one month, three months or six months. The longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor.

Purchase Process

T-bills can be purchased at auctions held by the government, or investors can purchase T-bills on the secondary market that have been previously issued. T-Bills purchased at auctions are priced through a competitive bidding process, at a discount from the par value. When investors redeem their T-Bills at maturity, they are paid the par value. The difference between the purchase price and par value is interest. For example, an investor purchases a par value $1,000 T-Bill for $950. When this T-Bill matures, the investor is paid $1,000, thereby making $50 on the investment.

Benefits to Investors

There are a number of advantages that T-bills offer to investors. They are considered low-risk investments because they are backed by the credit of the U.S. government. With a minimum investment requirement of just $1,000, and a maximum investment of $5 million, they are accessible by a wide range of investors. In general, interest income from Treasury bonds is exempt from state and local income taxes. They are, however, subject to federal income taxes, and some components of the return may be taxable at sale/maturity. The main downfall of T-bills is that they offer lower returns than many other investments, but these lower returns are due to their low risk. Investments that offer higher returns generally come with more risk.

For more on this topic, check out the Money Market: Treasury Bills Tutorial.

RELATED TERMS
  1. Coupon Pass

    The purchase of treasury notes or bonds from dealers, by the ...
  2. Broad Liquidity

    A category of the money supply which includes: all funds in M3, ...
  3. Federally Guaranteed Obligations

    A federally guaranteed obligation is debt that is backed by the ...
  4. Market Neutral Fund

    An aggressive type of mutual fund that aims to deliver superior ...
  5. Pre-Refunding Bond

    A type of bond issued to fund another callable bond, where the ...
  6. Cash Equivalents

    Investment securities that are short-term, have high credit quality ...
Related Articles
  1. Investing

    The History Of The T-Bill Auction

    Learn how the U.S. found the perfect solution to its debt problems and ended up creating one of the largest markets in the world.
  2. Investing

    Getting To Know The Money Market

    If you need liquidity and safety on a sum of money, don't forgo potential interest by keeping the funds as cash.
  3. Investing

    How To Compare Yields On Different Bonds

    Find out how to equalize and compare fixed-income investments with different yield conventions.
  4. Investing

    Why You Should Stick with Stocks over the Long Term

    Over the long term, it pays to stick with stocks, despite the inevitable bouts of volatility that wrack stock markets from time to time.
  5. Investing

    The Importance Of U.S. Treasury Rates

    U.S. Treasury bond interest rates affect more than just bondholders! It impacts the day to day lives of all consumers.
  6. Financial Advisor

    Why Cash is King When Markets are Volatile

    After the past several years, you might be addicted to equity. But when markets turn volatile, cash is the best option. Here's why.
  7. Investing

    Investing in Bonds: A Look at Returns and Risks

    A look at the risks, returns and ratings of different types of bonds.
RELATED FAQS
  1. How do I buy treasury bills?

    Discover how Treasury Bills (T-bills) are a safe-bet investment for short-term returns. The percentages on the returns vary. Read Answer >>
  2. When are treasury bills best to use in a portfolio?

    Understand the role that U.S. Treasury bills can play in an investment portfolio and why they represent one of the most liquid ... Read Answer >>
  3. How is the risk-free rate determined when calculating market risk premium?

    Learn how the risk-free rate is used in the calculation of the market risk premium, and understand why T-bills provide the ... Read Answer >>
  4. What are the differences between a treasury bond and a treasury note and a treasury ...

    Understand what types of securities the government issues, and learn the difference between Treasury notes, Treasury bonds ... Read Answer >>
  5. You are expecting interest rates to rise over the next few months ...

    1. Sell March T-bills short. When the rates rise, cover your own shorts by purchasing a like number of contracts.2. a = 91-9 ... Read Answer >>
  6. What are the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and ... Read Answer >>
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center