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. Variable Coupon Renewable Note ...

    A renewable fixed income security with variable coupon rates ...
  2. Broad Liquidity

    A category of the money supply which includes: all funds in M3, ...
  3. Market Neutral Fund

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

    A type of bond issued to fund another callable bond, where the ...
  5. Pull To Par

    The movement of a bond's price toward its face value as it approaches ...
  6. Cash Equivalents

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

    The Basics Of The T-Bill

    The U.S. government has two primary methods of raising capital. One is by taxing individuals, businesses, trusts and estates; and the other is by issuing fixed-income securities that are backed ...
  2. 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.
  3. Investing

    Introduction to Treasury Securities

    Purchasing bonds that are backed by the full faith and credit of the U.S. government can provide steady guaranteed income and peace of mind. Knowing the characteristics of each type of treasury ...
  4. Investing

    Investing Basics: Flight To Quality

    At times of market stress, investors flee from risky assets to investments the safest ones available.
  5. 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.
  6. Investing

    How Risk Free Is The Risk-Free Rate Of Return?

    This rate is rarely questioned - unless the economy falls into disarray.
  7. Investing

    How To Compare Yields On Different Bonds

    Find out how to equalize and compare fixed-income investments with different yield conventions.
RELATED FAQS
  1. What factors influence the price of treasury bills?

    Take a deeper look at some of the factors that influence the prices of Treasury bills, such as monetary policy set by the ... Read Answer >>
  2. 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 >>
  3. How are treasury bill interest rates determined?

    Find out why interest rates for U.S. Treasury bills are determined at auction and how so-called "competitive" bidders impact ... Read Answer >>
  4. What's the difference between bills, notes and bonds?

    Treasury bills (T-Bills), notes and bonds are marketable securities that the U.S. government sells in order to pay off maturing ... Read Answer >>
  5. I have a short period of time (1 year or less) during which I will have money to ...

    If you only have a short period of time in which to invest your money (i.e. less than one year), there are several investment ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  2. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  6. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
Trading Center