The imputed interest rate on a T-bill. As discussed earlier, T-bills are issued at a discount off their $1,000 par value, not quoted as a yield. To determine that yield, you need to know the price and the number of days to maturity. For simplicity's sake, a year is considered to be 360 days long, which assumes there are 30 days in a month. (This day-count convention may actually make things more complicated, but the 360-day year is now a tradition for calculating T-bill rates).

Computing a T-bill's discount yield is a three-step process. For these purposes, carry all computations out to six digits to the right of the decimal point. Treasury's mainframe carries it out 15 digits.
  1. Subtract the price you paid for the bond from $1,000. Take the difference and divide it by 1,000. Let's say you are buying the bond for $999.38. Subtract $999.38 from $1,000 and divide the resulting $0.62 by 1,000, and you end up with $0.000622.

  2. Now you take 360 - the number of days in a year, by convention - and divide that by the days to maturity. Let's assume it is a one-month bill, which usually matures more precisely in 28 days. Now divide 360 days by 28 days for a result of 12.857143.

  3. Now you multiply the result of step 1 by that of step 2. $0.00062 times 12.8571 equals 0.8%.

Look Out!
Do not get thrown off by orders of magnitude. A percentage is a number divided by 100. Do not think of 0.8% as 0.8%, but rather as 0.008. Sometimes bond traders refer to "basis points" or "BPs" or "beeps". A BP is a hundredth of a percent, or a percent of a percent. Maybe it will help you to think of 0.8% as "80 beeps".



You also need to be able to do this backwards. Given the rate, can you figure out the price?
  1. Multiply the rate by the number of days to maturity. In this case, multiply 0.008 times 28 days, and your result is 0.224.

  2. Divide the result of step 1 by the conventional number of days in a year. In this example, that would be 0.224 divided by 360, which gives you 0.0006222.

  3. Subtract the result of step 2 from 1. Following along, 1 minus 0.00662 would be 0.9993778.

  4. Multiply the result of step 3 by 1,000. This gives you the final figure of $999.38 (1,000 times 0.0003778).
Accrued Interest

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

    4 Types Of Money Market Yields

    Learn to calculate, and discover the difference between the 4 types of yields; bank discount yield, holding period yield, effective annual yield, and money market yield
  3. Investing

    How to compare the yields of different bonds

    Understand how to compare the yields of different bonds and find out how to equalize and compare fixed-income investments with different yield conventions.
  4. Investing

    Introduction to Treasury Securities

    Purchasing Treasury securities backed by the U.S. government and knowing their characteristics can provide a steady guaranteed income and peace of mind.
  5. Investing

    Investing in Bonds: A Look at Returns and Risks

    A look at the risks, returns and ratings of different types of bonds.
  6. 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.
  7. Investing

    Climb The Bond Ladder To Higher Income

    Whether it's learning how to ladder bonds or finding alternatives, investors seeking better returns need to be more active.
  8. Investing

    Equity Multiplier

    The equity multiplier is a straightforward ratio used to measure a company’s financial leverage. The ratio is calculated by dividing total assets by total equity.
  9. Managing Wealth

    How Bond Prices and Yields Work

    Understanding bond prices and yields can help any investor in any market.
Frequently Asked Questions
  1. What is the difference between closed-end credit and a line of credit?

    Understand the difference between closed-end credit, open-end credit, and lines of credit. Then find out how each are used ...
  2. Why is social responsibility important to a business?

    Socially responsible companies improve their brand, attract and retain top talent, and improve relationships with their customers ...
  3. How do interest rate changes affect the profitability of the banking sector?

    Learn how interest rates affect the banking sector. When interest rates rise, the profitability of the banking sector increases.
  4. How is the Exponential Moving Average (EMA) formula calculated?

    Learn the formula for calculating both simple moving averages and exponential moving averages, indicators that are frequently ...
Trading Center