Treasury Bills (T-bills) are the most marketable money market security. Their popularity is mainly due to their simplicity.
Essentially, T-bills are a way for the U.S. government to raise money from the public. In this tutorial, we are referring to
T-bills issued by the U.S. government, but many other governments issue T-bills in a similar fashion.
T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month,
six-month and one-year maturities. T-bills are purchased for a price that is less than their par (face) value; when they
mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase
price of the security and what you get at maturity. For example, if you bought a 90-day T-bill at $9,800 and held it until
maturity, you would earn $200 on your investment. This differs from coupon bonds, which pay interest semi-annually.
The biggest reasons that T-Bills are so popular is that they are one of the few money market instruments that are
affordable to the individual investors. T-bills are usually issued in denominations of $1,000, $5,000, $10,000, $25,000,
$50,000, $100,000 and $1 million. Other positives are that T-bills (and all Treasuries) are considered to be the safest
investments in the world because the U.S. government backs them. In fact, they are considered risk-free. Furthermore,
they are exempt from state and local taxes.
The only downside to T-bills is that you won't get a great return because Treasuries are exceptionally safe. Corporate
bonds, certificates of deposit and money market funds will often give higher rates of interest. What's more, you might not
get back all of your investment if you cash out before the maturity date.
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.
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.
Question 22 page 203
You purchase a 1-month T-bill with a face value of $1,000 for $995. What yield would be reported on this T-bill in a
financial newspaper?
r = [(1,000 P)/P] x (365/d)
r = (1000 - 995) / 995 x 365/30
r = 0.0611
r = 6.11%
Question 23 page 203
n the financial page of todays newspaper you see that 6-month T-bills yield 3.5%. What is the current price of these Tbills?
r = [(1,000 P)/P] x (365/d)
0.035 = [(1000 P) x (365/182)
0.017452 = [(1000 P)/P]
0.017452P = 1000 P
1.017452P = 1000
P = $982.85