Short-term obligations of a Government issued for periods of one year or less. Treasury bills do not carry a rate of interest, but are issued at a discount on the par value. Treasury bills are repaid at par on the due date.
Treasury Bills (or T-Bills for short) are a short-term financial instrument that is issued by the US Treasury with maturity periods ranging from a few days up to 52 weeks (one year). They are considered among the safest investments since they are backed by the full faith and credit of the United States Government.
When an investor buys a Treasury Bill, they are lending money to the government. The US Government uses the money to fund its debt and pay ongoing expenses such as salaries and military equipment. T-Bills are sold in denominations ranging from $1,000 (standard) up to a maximum of $5 million.
Example of Treasury Bills
Treasury bills are sold at a discount to the par value, which is its actual value. For example, a Treasury bill with a par value of $10,000 may be sold for $9,500. The US Government, through the Department of Treasury, promises to pay the investor the full face value of the T-bill at its specified maturity date.
Upon maturity, the government will pay the investor $10,000, resulting in a profit of $500. The amount of profit earned from the payment is considered the interest earned on the T-bill.
The difference between the face value of the T-bill and the amount that an investor pays is called the discount rate, which is calculated as a percentage. In this case, the discount rate is 5% of the face value.