Treasury

Treasury

I have frequently written about how Treasury bills, which are also known as "T-bills," are a loan you make to the US Government. They are considered an investment instead of a loan because they are backed by the US Government and it has never defaulted on a loan. They are considered a special class of investment called a “security’ because your investment is “secure” and you are guaranteed to both get your capitol back and a small profit. They are very popular for people who are risk adverse.

Face Value and Purchase cost.
Treasury bills have a face value of a certain amount, which is what they are actually worth. But they are sold for less. For example, a bill may be worth $10,000, but you would buy it for $9,600.

Face value also called Par value
The face value of a treasury bill is also called its par value, and the most commonly sold bills have a par between $1,000 and $10,000. The minimum amount you can buy a bill for, though, is $100. T-bills are sold in increments of $100 up to $1 million.

Maturity Date
Every bill has a specified maturity date, which is when you receive money back. The government then pays you the full price of the bill -- in this case $10,000 -- and you earn $400 from your investment.
The amount that you earn is considered interest, or your payment for the loan of your money.

All treasury bills are short-term investments and mature within a year from their date of issue. You have the option of buying bills with maturity periods of one month, six months or one year. Generally, the longer the maturity period, the more money you will make from your investment. Treasury bills are issued for terms of 4, 8, 13, 26, and 52 weeks.

Discount Rate
When you pay $9600 for a Treasury Bill worth $10,000 at maturity, the difference between the value of the bill and the amount you pay for it is called the discount rate, and is set as a percentage.

For example, When you pay $9600 for a Treasury Bill worth $10,000 at maturity, the difference between the value of the bill and the amount you pay for it is $400 dollars. Therefore the discount rate is 4 percent, because $400 is 4 percent of $10,000.

Safety
Treasury bills are widely considered one of the safest forms of investment in the world because they are backed by the U.S. government. They are considered risk-free. They are also used by many other governments throughout the world. [source: TreasuryDirect].

Variable Treasury Bills
Another type of Treasury bill, the cash management bill, is issued in variable terms, usually of only a matter of days.

[source: TreasuryDirect].

Liquidity
Treasury bills are also a highly liquid form of investment. This means that they are easily tradable. They can be sold on the secondary market and easily converted into cash. If you sell a bill on the secondary market, you sell it to someone else instead of waiting for it to mature.
One of the only downsides to treasury bills is that the returns are smaller than those from many other forms of investment. This is because they are so low-risk.
[source: TreasuryDirect].

Where to Buy
Treasury Bills can be bought at a bank, from a dealer or broker, or online from a website like TreasuryDirect.

The bills are technically issued through a weekly auction bidding process. The bills are issued in digital format not paper.

Other Sources of information for further reading: [source: TreasuryDirect].