ACCT-702 Chapter 6

Definition of 'Treasury Bill - T-Bill'

A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

Investopedia explains 'Treasury Bill - T-Bill'

For example, let's say you buy a 13-week T-bill priced at $9,800. Essentially, the U.S. government (and its nearly bulletproof credit rating) writes you an IOU for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would with a coupon bond, for example. Instead, the appreciation - and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ($10,000). In this case, the T-bill pays a 2.04% interest rate ($200/$9,800 = 2.04%) over a three-month period.

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 Basics Of The T-Bill 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 203You 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 365/30r = 0.0611r = 6.11%Question 23 page 203n the financial page of todays newspaper you see that 6-month T-bills yield 3.5%. What is the current price of these T-bills?r = [(1,000 P)/P] x (365/d)0.035 = [(1000 P) x (365/182)0.017452 = [(1000 P)/P]0.017452P = 1000 P1.017452P = 1000P = $982.85

The Basics Of The T-Bill 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 203You 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)__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Question 23 page 203n the financial page of todays newspaper you see that 6-month T-bills yield 3.5%. What is the current price of these T-bills?r = [(1,000 P)/P] x (365/d) __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________