Treasury bill definition
/What is a Treasury Bill?
A treasury bill is a short-term debt security that is issued by the United States government to raise money. It has the following characteristics:
Maturity dates. It is issued with maturity dates of either four weeks, 13 weeks, or 26 weeks.
Interest rate. There is no stated interest rate on the instrument; instead, it is sold at a discount to the face amount, and the buyer earns interest on the difference between the discounted purchase price and the redemption amount.
Purchase process. Treasury bills are sold via a competitive bidding process, so the discount amount will vary by auction. For example, the Treasury sells a treasury bill with a face value of $1,000 for $984. The $16 difference is the interest that the investor will earn.
Rate of return. The return on treasury bills tends to be quite low, because they are perceived to have no risk.
Who Buys Treasury Bills?
Treasury bills are popular among investors who want to avoid all risk, since these instruments are backed by the credit of the United States government. Institutional investors are the primary purchasers of treasury bills.
Related AccountingTools Courses
Advantages of Investing in Treasury Bills
There are several advantages to investing in treasury bills, which include the following:
Risk-free investment. Treasury bills are backed by the government, making them one of the safest investments available. There is virtually no risk of default, as governments have strong creditworthiness.
Short-term maturity. Treasury bills have short-term maturity periods (e.g., 4 weeks, 13 weeks, 26 weeks, and 52 weeks), making them ideal for investors looking for quick returns.
Liquidity. Treasury bills can be easily bought and sold in the secondary market before maturity.
No interest rate risk. Since treasury bills do not pay periodic interest and are sold at a discount, investors are not affected by fluctuating interest rates like bonds with fixed coupon payments.
Predictable returns. The return on treasury bills is known at the time of purchase, as investors receive the full face value at maturity.
Tax advantages. In many countries, including the United States, treasury bill earnings are exempt from state and local taxes (but subject to federal taxes). This can provide a tax advantage over other interest-earning investments.
Low minimum investment. Investors can start with as little as $1,000, making treasury bills accessible to both small and large investors.
Diversification. Treasury bills help diversify a portfolio by reducing overall risk, as they are not correlated with stocks or other riskier assets.
No maintenance fees. Unlike mutual funds or other managed investments, treasury bills do not require management fees, making them a cost-effective investment.
Useful for cash management. Treasury bills are a great place to park excess cash temporarily, allowing investors to earn risk-free returns while deciding on long-term investments.
In short, treasury bills offer a secure, liquid, and predictable investment option with tax advantages and zero default risk. They are ideal for investors seeking capital preservation and short-term financial planning.