Treasury Bills, also called T-bills, are short-term U.S. government-backed debt obligations. T-bills are offered in $100 denominations to a maximum $5 million purchase and mature in under one year. A competitive bidding process is used to issue them at a discount from their par (face) value. Instead of having fixed interest payments as conventional bonds due, the bond appreciation serves as the return.
Maturity terms for T-bills are four, thirteen, 26, and 52 weeks. As an example, an individual might purchase a 13-week T-bill for $9,900. The government might issue an IOU that it will repay the person $10,000 in three months. Unlike a coupon bond, the holder does not receive regular payments. Instead, the bond appreciation is the difference between what the person paid and what is received at the end of the 13-week period, in this case $100.
It is possible for a T-bill auction to result in a price that equals par. When this happens, the U.S. Treasury issues and redeems the securities at par value. T-bills can be purchased online from TreasuryDirect, a Web site maintained by the U.S. Treasury. T-bills may also be purchased through brokers and banks. Individuals, estates, trusts, partnerships, corporations, and various other entities may open T-bill accounts.
T-bills are useful for diversifying investment portfolios with a product that is secure and has a short-term nature. They may be held until they mature or sold before that time, with no minimum term of ownership required. Investors will find them auctioned on a regular schedule, with the discount rate determined at each auction.
In recent auctions, four-week T-bills sold at a zero percent discount rate, 13-week bills had a 0.015 percent discount, 26-week bills had a 0.045 percent discount rate, and the discount rate for 52-week bills was 0.100. Interest income on T-bills is subject to federal income tax but is exempt from local and state income taxes.
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