Treasury bills are short-term (maturity of less than one year) debt obligations issued by the US government in \$100 increments. "T-bills," as they are commonly called, are sold at auction. They sell at a discount to face value, with investors collecting the full face value at maturity. Once issued, they can be bought and sold through a brokerage account. The first step in the process is learning to read the quote.

 Maturity Bid Ask Change Yield 10/10/15 0.04 0.03 -0.01 0.03
• Maturity (sometimes shown as “issue”): This is the date the bill will be redeemed and the investor paid the face value amount. For purposes of this example, assume the maturity date is 100 days in the future.

• Bid: The bid represents the interest rate the buyer wants to be paid. Converting the bid into an actual price requires a bit of work. The process involves multiplying the bid (dropping the decimals) by the number of days until maturity and then dividing by 360 and then subtracting that number from 10,000.

4*100/360=\$1.11

\$10,000-\$1.11=\$9,998.89

In this example, the buyer is willing to pay \$9,998.89 for a bill that will be redeemed for \$10,000 in 100 days.

• Ask: The ask represents the interest rate the seller is willing to pay. The equation to determine the ask price is the same as that used to determine the bid. Simply replace the ask price with the bid price in the equation.

3*100/360=\$0.83

\$10,000-\$0.83=\$9,999.17

In this example, the seller is willing to accept \$9,999.17 for a bill that will be redeemed for \$10,000 in 100 days.

• Change: The change shows the difference from the prior bid. In this case, the prior bid was higher by 0.01 basis points.

• Yield: The yield is the annualized rate of return if held until maturity based on the ask price. In this example, the yield is 0.03.

The Bottom Line

Trading Treasury bills isn't difficult. Like any new discipline, it just requires a small investment of time and effort to learn the fundamentals. That investment begins with learning to read Treasury bill quotes. Once you understand the quotes, trading Treasury bills is as easy as trading stocks and bonds. To learn more about Treasury bills, read Introduction to Treasury Securities.

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