T-bills : What is it, Advantages and disadvantages, Purchasing (2024)

Table of Contents

  1. T-bills
  2. What is a T-bill?
  3. Understanding T-bills
  4. Advantages and disadvantages of T-bills
  5. Purchasing T-bills
  6. Example of a treasury bill
  7. Frequently Asked Questions


T-bills, also called Treasury Bills, are a form of short-term debt issued by the United States government. They are a famous investment option for those seeking a low-risk income source. The US government issued the first T-bills in the early 1900s when it first started issuing short-term debt securities to fund the nation’s operations. With little to no default risk, they are among the safest investments.

What is a T-bill?

A government-issued short-term debt instrument with a typical maturity of less than one year is a T-bill. As the US government backs T-bills with its full faith and credit, they are among the safest investments in the world. The Department of the Treasury issues T-bills. The government pays the holder the full face value when they mature, despite being issued at a discount to their face value. T-bills are a popular, low-risk, short-term investment choice for investors. They have a steady return and are easy to trade on the secondary market because of their high liquidity.

Understanding T-bills

The US government issues T-bills to pay for various public works initiatives, including building roads and schools. The US government issues an IOU to the investor when they buy a T-bill. T-bills are considered a secure and conservative investment, given that the US government backs them.

T-bills are typically kept until they reach maturity. However, some holders prefer to cash out before maturity and take advantage of the investment’s short-term interest gains by reselling it on the secondary market. T-bill maturities can be as short as a few days, but the treasury has listed maturities of four, eight, 13, 17, 26 and 52 weeks.

Advantages and disadvantages of T-bills

The following are the advantages of T-bills:

  • T-bills are backed by the US government’s full faith and credit, making them one of the safest investments. There is almost no risk of default.
  • T-bills can be bought and sold easily on the open market, making them a highly liquid investment. Investors can purchase T-bills directly from the treasury or buy them through a broker or bank.
  • Although the returns on T-bills are relatively low compared to other investments, they are still competitive with other short-term investments. T-bills are often used as a benchmark for other short-term investments.
  • The interest on T-bills is exempt from state and local taxes, making them a tax-efficient investment. Additionally, the interest on T-bills is subject to federal income tax but is exempt from FICA taxes.
  • T-bills can be used to diversify an investment portfolio and reduce overall risk.

The following are the disadvantages of T-bills:

  • The returns on T-bills are generally lower than other investments, such as stocks or bonds. This means that investors looking for high returns may not find T-bills attractive.
  • Since T-bills have fixed interest rates, inflation can erode the purchasing power of the returns earned from these investments. This means that investors may need help to keep up with inflation, resulting in a decline in real returns.
  • T-bills are issued with maturities of only a few weeks to a few months. This means that investors looking for longer-term investments may need alternative options.
  • If interest rates rise, the value of T-bills will decline, resulting in a potential loss for investors who need to sell their holdings before maturity.
  • T-bills are less liquid than other investments, such as stocks, and investors may need to wait for the maturity date to access their funds.

Purchasing T-bills

Investors can buy T-bills from the government directly by taking part in treasury auctions and through a bank or broker. Investors who want to buy T-bills must have an account with a bank or broker participating in treasury auctions. Once an account has been created, the investor can order T-bills from the bank or broker.

Investors can bid on T-bills during a Treasury auction for a specific amount and maturity date. Weekly Treasury auctions are held, and the US Treasury publishes the schedule in advance.

Investors can purchase T-bills for less than their par value because they are sold at a discount to their face value. The investor receives the bill’s face value when the T-bill matures. The investor’s profit is the difference between the purchase price and the face value.

Example of a treasury bill

A treasury bill example would be a US$10,000 T-bill with a maturity date of 91 days, a discount rate of 0.2%, and an issue date of January 1, 2023. The investor would buy the T-bill for US$9,997.50 (10,000 – 2.50) and hold it until it matures on April 1, 2023.

When the investment matures, the investor will receive the US$10,000 face value of the T-bill. The price paid minus the face value represents the return on investment. In this instance, the fictitious return on investment is US$2.50 or 0.025 per cent.

Frequently Asked Questions

How to buy a T-bill?

To buy a T-billl, you must have a Treasury direct account with the US Department of the Treasury, and you can purchase T-bills directly from the government through an auction process. You can also buy T-bills through a broker or financial institution, but they will charge you a fee for their services.

How are T-bills different from treasury notes and bonds?

T-bills, treasury notes, and bonds differ in their maturity periods. T-bills have a maturity period of up to one year, treasury notes have maturities ranging from two to ten years, and treasury bonds have more than 10 years.

Why does the government issue T-bills?

The government issues T-bills to finance short-term borrowing needs, such as funding budget deficits or managing cash flow.

Who should consider investing in T-bills?

Investors seeking a low-risk investment with a predictable return and a short-term investment horizon may consider investing in treasury bills.

What are the types of T-bills?

The types of T-bills are:

  • A 4-week T-bill has a maturity period of four weeks or 28 days.
  • A 13-week T-bill has a maturity period of 13 weeks or 91 days.
  • A 26-week T-bill has a maturity period of 26 weeks or 182 days.
  • A 52-week T-bill has a maturity period of 52 weeks or 364 days.
T-bills : What is it, Advantages and disadvantages, Purchasing (2024)


T-bills : What is it, Advantages and disadvantages, Purchasing? ›

Pros and Cons

What is the downside of buying T-bills? ›

As a result, T-bills have interest rate risk meaning there is a risk that existing bondholders might lose out on higher rates in the future. Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit.

What is the #1 benefit in purchasing a T bill? ›

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

How much does a $1000 T bill cost? ›

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.

What do I need to know about buying T-bills? ›

Key Facts:
  • Bills are sold at a discount. ...
  • Bills pay interest only at maturity. ...
  • Bills are sold in increments of $100. ...
  • All bills except 52-week bills and cash management bills are auctioned every week. ...
  • Cash management bills are issued in variable terms.
  • Bills are issued in electronic form.

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