What Is a Treasury Bill? T-Bills Defined

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A Treasury bill is a form of debt obligation, short-term, that come from the United States government. It’s issued by the Department of the Treasury, hence the name. A Treasury bill’s definition is similar to that of a Treasury note and bond in that it’s one of the safest forms of investment. Treasury bills appeal to investors because they are affordable, liquid and easy to buy.

What Is a Treasury Bill?

A treasury bill is government-issued security that must come to maturity within one year. Maturity in this sense means the date when the bill can be sold at its full face value. Buying a Treasury bill is basically like making a loan to the government in exchange for interest.

Treasury Bills Versus Bonds and Other Securities

Treasury bills, notes and bonds are all fixed-income investments sold by the U.S. government to fund debt and pay expenses. The bill is a zero-coupon security that does not pay interest until it matures.

Unlike bonds and notes, which accrue interest periodically, the T-bill’s interest payment is built into the face value, which is also referred to as the par value. Investors buy T-bills at a discounted par value — i.e., for less than face value — and make their money back after the bill’s maturity date. Treasury bill rates refer to the discount rate, which in recent auctions has ranged from 0.075% to 0.14%.

Here’s how T-bills stack up to other Treasury securities:

• Coupon: Notes and bonds are sold at face value.
• Interest: Notes and bonds are paid interest semi-annually.
• Terms: Notes are available in terms of 2, 3, 5, 7 and 10 years. Terms for bonds range from 20 to 30 years.

How Does a Treasury Bill Work?

There are two ways to buy Treasury bills. The first is directly from the U.S. Treasury. You don’t need a Treasury bill account, per se, but you will need to open a general account in TreasuryDirect. You also can buy T-bills through a bank, broker or dealer.

When you purchase T-bills through the U.S. Treasury, you agree to accept the discount rate available at auction time. This is called a non-competitive bid. If you buy the bills through a bank, broker or dealer, you may place a non-competitive or competitive bid.

Here are more details about how Treasury bills work:

• Maturity period: 4, 8, 13, 26 or 52 weeks
• Denominations: Treasury bill denominations are available in multiples of $100.
• Interest/Profit: Interest is the difference between the face value and purchase price and is paid when the bill matures.
• Tax: You must pay federal income taxes on interest earned. Interest is not subject to state and local taxes.
• Availability: Most T-bills (excluding 52-week and cash management bills) are auctioned every week. Auctions for 52-week T-bills occur every four weeks.

What Is the Difference Between a Treasury Bill and a Treasury Note?

Like a Treasury note, a Treasury bill is an instrument of the U.S. Treasury backed by the federal government. The primary difference between them is the length of the terms.

• Treasury bills are sold with terms of 4, 8, 13, 26 and 52 weeks.
• Treasury bonds are sold with terms of 2, 3, 5, 7 and 20 years.

Also, Treasury notes accrue interest semi-annually. The return on your T-bill investment comes when you sell the bill at or above face value after it matures.

Who Are Treasury Bills Best For?

Like with every other investment product, it helps to do your research before purchasing Treasury bills. They’re generally safe, but that doesn’t mean they’re the right choice for every investor. Here’s a quick look at the pros and cons of Treasury bills:

Pros

• Zero default risk
• U.S. government guarantee
• Easy to purchase
• High liquidity

Cons

• Treasury bill yields are lower than bonds and certificates of deposit.
• If sold early, T-bill prices are lower than the purchase price.
• T-bills may not keep up with inflation.

T-bills have been a go-to product for investors looking for a safe place to invest their money. During periods of market instability, they may pull their money out of volatile stocks and hold it in lower-risk securities.

Treasury Bill Average Return

What does this mean for you? Say, for example, you purchase a 13-week T-Bill with a face value of $1,000. If the price per $100 is $99.974722, you pay $999.75 for the bill.

You may choose to hold on to the T-bill until it matures, at which time you receive the full face value. Alternatively, you can sell it on the secondary market before it matures.

Can You Lose Money in Treasury Bills?

Since Treasury bills are backed by the U.S. government, there is virtually no risk of default. But investors can lose money on these securities if they sell them for less than they paid for them. However, this doesn’t happen often.

Jose Vazquez contributed to the reporting for this article.

This article has been updated with additional reporting since its original publication.

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