What is a Treasury Bill?

The United States Treasury Bill is a debt instrument issued by the federal government to collect funds for various public projects. These are short-term debt obligations backed by full faith and credit of the United States Government. US Treasury bill is considered to be the safest method of investment, and thus it yields a comparatively lower rate of interest. Treasury bills are typically sold in the denomination of $100 (prior to 2008, it was $1,000), however, some of them can reach up to $5 million. These are short term investment with a maximum of 52 weeks of maturity. The interests of the Treasury Bills are not paid prior to maturity, they are sold at a discount of the par value to create a positive yield at maturity.

How Does a Treasury Bill Work?

All the U.S. Treasury securities including Treasury Bills are issued by the United States Department of the Treasury. Buying a U.S Treasury Bill means you are lending money to the federal government of the United States for a specified period of time. Treasury Bills are usually issued with maturity dates of 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks. The interest rate depends on the maturity duration of the bill. An investor may resell the investment in the secondary market to cash out the bill. However, as these investments are almost fully secure, generally the investors hold it until the maturity date. The treasury bills are offered at a discount price from par value of the bill. That means, if the par value or face value of a bill is $1,000, it can be sold at $950. The investor will get the par value or face value of the bill upon maturity. The difference between the par value and the purchase price is the interest earned by the investor. Treasury bills do not offer regular interest payments, the interest of the treasury bill is reflected in the amount received upon maturity of the bill. The interests earned from treasury bill are exempted from state and local taxes. However, these earning are taxable under the federal government tax system. Treasury bills are offered in the single price auctions held by the federal government on TreasuryDirect site. 13-week and 26-week bills are announced each Thursday. The announced bills are auctioned on the following Monday and issued on next Thursday. 4-week and 8-week bills are announced on Monday, and these are auctioned on the next day (Tuesday) and issued on the following Thursday. The 52-week bills are announced every fourth Thursday, auctions are done on the following Tuesday and are issued on next Thursday. The matured treasury bills can be redeemed on each Thursday. Competitive and noncompetitive bidding processes are used for pricing the Treasury Bills. In a competitive bid, the price is set at a discount from the par value of the bill, the investors are then allowed to specify the yield they wish to get from the bill. The bids are processed through a local bank or a licensed broker. Individual bidders can bid through the TreasuryDirect website. In Noncompetitive bids, the investors submit a bid to purchase a set dollar amount of bills. The yield of the investment is then decided based on the average of all the bids received. Treasury bills are mostly acquired by the banks and financial institutions, particularly the primary dealers. An investor can purchase a previously issued Treasury bill in the secondary market through a broker. Since the Treasury Securities are generally safest of all investments, the demand for such securities increases during the rise of economic crisis. Like any other debt securities, the price of Treasury Bill also fluctuates depending on many factors including economic condition, financial policy, and the overall supply and demand of the Treasury bills. The financial policy of the Federal Reserve has a great impact on the Treasury Bill Prices. The Federal Reserve sets the funds rate, that is the interest rate that banks charge other banks for lending money from their reserve balances on an overnight basis. The federal fund rates are set by the Federal Reserve to control the availability of money in the economy. A lower rate increases the money in the system and a higher Federal Fund rate decreases money for banks to lend. When the Federal fund rates are high, it is more likely to draw away money from Treasuries and into higher yielding investments. As the rate of Treasury bill is fixed, during the hiking of the Federal Fund rates, investors tend to sell the Treasury bills. During the time, when the inflation rate is higher than the Treasury Bill return, the demand for Treasury Bills decreases significantly. The risk tolerance of the investors also affects the prices of the Treasury Bills. When the other investments appear less risky, the price of Treasury Bill tends to fall.