Treasury Bill (T-Bill)

A U.S. government promissory note issued by the U.S. Treasury with a maturity period of up to one year. T-Bills are sold at a discount to face value, which is paid out at maturity, providing interest income to the investor.

Definition

Treasury Bill (T-Bill) is a short-term debt instrument issued by the U.S. Treasury with a maturity period of up to one year. Unlike Treasury bonds and Treasury notes, which have longer maturity periods, T-Bills are designed to meet immediate funding needs of the U.S. government. T-Bills are sold at a discount to their face value, enabling the government to borrow funds without paying periodic interest. Instead, an investor earns interest income by receiving the full face value at maturity.

Key Features

  • Issuance: U.S. Treasury
  • Maturity Period: Up to 1 year
  • Interest Payment: At maturity, as the difference between purchase price and face value
  • Denominations: Commonly in multiples of $1,000
  • Type: Discount security

Function and Usage

T-Bills are used by the government to raise short-term funds and are considered one of the safest investment vehicles due to the backing of the U.S. government. They are a popular choice for investors looking to preserve capital with minimal risk.

Examples

  1. Example 1: An investor purchases a $10,000 Treasury Bill at a price of $9,800. Upon maturity, the investor receives the face value of $10,000. The interest income earned by the investor is $200.

  2. Example 2: A corporation looking to park excess cash buys Treasury Bills worth $5 million. They achieve a short-term investment yielding a predetermined amount upon maturity with negligible credit risk.

Frequently Asked Questions (FAQs)

1. How are Treasury Bills sold?

T-Bills are sold through auctions conducted by the U.S. Treasury. They can be purchased directly from TreasuryDirect or through banks and brokers.

2. Are T-Bills a good investment for individuals?

T-Bills are considered very safe as they are backed by the U.S. government. They are suitable for conservative investors looking for a secure, short-term investment option.

3. What is the minimum purchase amount of a T-Bill?

The minimum purchase amount for a T-Bill is $100.

4. Is the interest income from T-Bills taxable?

Interest income from T-Bills is exempt from state and local taxes but subject to federal taxes.

5. Can T-Bills be sold before maturity?

Yes, T-Bills can be sold in the secondary market before maturity, though their liquidity and price may vary.

  • Treasury Note (T-Note): Intermediate maturity government securities ranging from 1 to 10 years.
  • Treasury Bond (T-Bond): Long-term government securities with maturities longer than 10 years.
  • Discount Security: A security sold below its face value and redeemed at maturity for full face value.
  • Yield: The earnings generated and realized on an investment, expressed as a percentage.

Online Resources

Suggested Books for Further Studies

  1. “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
  2. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
  3. “Fixed Income Analysis” by Barbara S. Petitt and Jerald E. Pinto

Fundamentals of Treasury Bills (T-Bills): Finance Basics Quiz

### What is the maximum maturity period of a Treasury Bill? - [x] One year - [ ] Five years - [ ] Ten years - [ ] Thirty years > **Explanation:** Treasury Bills have a maximum maturity period of one year. T-notes and T-bonds have longer maturities. ### How is interest income from a T-Bill calculated? - [ ] Monthly interest payments. - [ ] Quarterly interest payments. - [x] Difference between purchase price and face value at maturity. - [ ] Fixed annual coupon payments. > **Explanation:** Interest income from a T-Bill is earned as the difference between the purchase price (discounted price) and the face value received at maturity. ### What is the primary advantage of investing in T-Bills? - [x] Safety and reliability as they are backed by the U.S. government. - [ ] High-interest rates compared to corporate bonds. - [ ] Regular interest payments. - [ ] Long-term gains. > **Explanation:** T-Bills are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. ### Who is the issuer of Treasury Bills? - [ ] Federal Reserve - [ ] U.S. Municipalities - [x] U.S. Treasury - [ ] Banks > **Explanation:** The U.S. Treasury issues Treasury Bills to finance the government's short-term borrowing needs. ### Are T-Bills subject to state and local income taxes? - [ ] Yes, they are fully taxable. - [ ] Only subject to local taxes. - [ ] Both state and federal taxes apply. - [x] Exempt from state and local taxes but subject to federal taxes. > **Explanation:** Treasury Bills are exempt from state and local taxes but are subject to federal income tax. ### What is a key feature that sets T-Bills apart from other Treasury securities? - [ ] They have quarterly coupon payments. - [x] They are sold at a discount. - [ ] They offer higher yields. - [ ] They have long maturities. > **Explanation:** The key feature of T-Bills is that they are sold at a discount to face value and do not have periodic interest payments. ### Can T-Bills be sold before maturity? - [x] Yes, they can be sold in the secondary market. - [ ] No, they must be held to maturity. - [ ] Only in a financial crisis. - [ ] Not without penalty. > **Explanation:** T-Bills can be sold in the secondary market before they reach maturity. ### Where can individuals purchase T-Bills directly? - [ ] Stock Market - [x] TreasuryDirect - [ ] Corporate Banks - [ ] Insurance Companies > **Explanation:** Individuals can purchase Treasury Bills directly from the U.S. Treasury via the TreasuryDirect website. ### What is a Treasury Note (T-Note)? - [ ] A zero-coupon bond. - [x] An intermediate-term government security with maturities ranging from 1 to 10 years. - [ ] A short-term debt instrument. - [ ] A long-term investment with 30-year maturity. > **Explanation:** Treasury Notes (T-Notes) are intermediate-term securities with maturities ranging from 1 to 10 years. ### What does buying a T-Bill involve in terms of payment? - [ ] Paying the full face value upfront. - [ ] Monthly installment payments. - [ ] Providing collateral until maturity. - [x] Paying less than the face value upfront. > **Explanation:** Buying a T-Bill involves paying less than the face value upfront, with the full face value paid at maturity.

Thank you for exploring our comprehensive guide and quiz on Treasury Bills (T-Bills). Continue to deepen your understanding of fixed income securities and investment strategies!

Wednesday, August 7, 2024

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