Define: Treasury Bill

Business, Legal & Accounting Glossary

Definition: Treasury Bill



What is the dictionary definition of Treasury Bill?

Dictionary Definition


Treasury Bill is a negotiable debt obligation issued by a government. Treasury bills are considered to be short-term, as the period of maturity is one year or less. They are exempt from local and state taxes. They are the safest form of marketable investment.


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Full Definition of Treasury Bill


To help finance federal spending, the Treasury sells short term debt securities known as a Treasury bill. A private investor can invest in a Treasury bill with maturities ranging from 90 to 360 days. A Treasury bill tends to be sold at weekly auctions open to public participation. A Treasury bill can also be purchased directly from a Federal Reserve Bank in denominations starting at $10,000 and rising in increments of $5,000.

A Treasury bill does not pay interest. They are sold at a discount, with the holder receiving full face value upon maturity. The larger the discount on a Treasury bill, the higher the rate of return. A $10,000 Treasury bill purchased for $9600 and maturing in 360 days, for example, carries a return of approximately four per cent return.

Popularly known as T-bills in the US, they can be purchased in $1,000 denominations. One can purchase treasury bills amounting to a maximum of $5 million. Normally these bills attain maturity in one month, three months, six months, or a year.

The process of issuance of treasury bills is done by bidding. The holder of the bill need not pay any fixed interest. The bill holder gets payment on the appreciation of the bond. The bills are available for sale in the secondary market. Each T-bill is authorized and identified by a singular CUSIP number.

For example, you could buy a 13-week T-bill priced at $9,700. At this point, the US government would owe you $10,000, due in three months. Thus, you are earning the difference between what you paid (the discounted value) and what the government pays you: $300. The result is the government pays a 3.09% interest rate ($300/$9,700 = 3.09%) over the tenure of three months.

The payout amount is called the face value; the purchase amount is sold at a discount rate of the face value. There is only one payout. There are no semi-annual premiums made.

T-bills are issued to fund overall operations of the federal government, and regulating money supplies in a country. The opening of TreasuryDirect has enabled the online purchase and selling of T-bills. These are transferred to the bank account of the buyer.

Along with bank deposits, treasury bills are often regarded as the risk-free rate. When calculating the capital market line, this interest rate is needed and is represented as r sub f.

Treasury bills are different from treasury notes and treasury bonds in that they offer the shortest term. Treasury notes mature between one and ten years, while Treasury bonds mature in more than 10 years.

Treasury bills were first issued in 1877 in the United Kingdom.

Treasury Bills in the US

Treasury bills were first issued in the US in 1929. They are issued by the US Department of the Treasury, Bureau of the Public Debt.

In the US, major newspapers list the yields of T-bills. Items they list are:

Types

There are different types of treasury bills depending upon the maturity period and utility of the issuance. They are ad-hoc treasury bills, 3-month, 6-month, and 12-month bills. (In the US, they are 52-week terms, while in India they are 364-day terms.)

The ad-hoc T-bills are known as cash management bills. They are not offered on a regular schedule. Their terms are variable and are often only a few days.

Amounts

Treasury bills are offered in multiples of $100.

Auctions

Auctions are done online, via TreasuryDirect. All the paper bills of the past have matured. However, bidding can also be done by post or phone.

Noncompetitive Bid

A noncompetitive bid offers the buyer the discount rate that is decided at the auction. The buyer is assured of receiving the desired security in the desired amount.

Competitive Bid

A competitive bid involves the buyer (the bidder) setting the minimum acceptable discount rate. The bidder is not assured of receiving the desired security or desired amount (if received). A competitive bid must be placed through a bank, a dealer, or a broker.


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Definition Sources


Definitions for Treasury Bill are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 2nd April, 2020