Treasury Bill

A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed

by the Treasury Department with a maturity of one year or less. Treasury bills
are usually sold in denominations of $1,000. However, some can reach a
maximum denomination of $5 million in non-competitive bids. These securities
are widely regarded as low-risk and secure investments.

The Treasury Department sells T-Bills during auctions using a competitive and
non-competitive bidding process. Noncompetitive bids—also known as non-
competitive tenders—have a price based on the average of all the competitive
bids received. T-Bills tend to have a high tangible net worth.

The U.S. government issues T-bills to fund various public projects, such as
the construction of schools and highways. When an investor purchases a T-
Bill, the U.S. government is effectively writing an IOU to the investor. T-bills
are considered a safe and conservative investment since the U.S. government
backs them.

T-Bills are normally held until the maturity date. However, some holders may
wish to cash out before maturity and realize the short-term interest gains by
reselling the investment in the secondary market.

T-Bill Maturities
T-bills can have maturities of just a few days or up to a maximum of 52 weeks,
but common maturities are 4, 8, 13, 26, and 52 weeks. The longer the maturity
date, the higher the interest rate that the T-Bill will pay to the investor.

T-Bill Redemptions and Interest Earned

T-bills are issued at a discount from the par value—or the face value—of the
bill, meaning the purchase price is less than the face value of the bill. For
example, a $1,000 bill might cost the investor $950 to buy the product.

When the bill matures, the investor is paid the face value—par value—of the
bill they bought. If the face value amount is greater than the purchase price,
the difference is the interest earned for the investor. T-bills do not pay regular
interest payments as with a coupon bond, but a T-Bill does include
interest, reflected in the amount it pays when it matures.

T-Bill Tax Considerations

The interest income from T-bills is exempt from state and local income taxes.
However, the interest income is subject to federal income tax. Investors can
access the research division of the TreasuryDirect website for more tax
information.
Purchasing T-bills
Previously issued T-bills can be bought on the secondary market through a
broker. New issues of T-Bills can be purchased at auctions held by the
government on the TreasuryDirect site. T-bills purchased at auctions are
priced through a bidding process. Bids are referred to as competitive or non-
competitive bids. Further bidders can be indirect bidders who buy through a
pipeline such as a bank or a dealer. Bidders may also be direct bidders
purchasing on their own behalf. Bidders range from individual investors to
hedge funds, banks, and primary dealers.

A competitive bid sets a price at a discount from the T-bill's par value, letting
you specify the yield you wish to get from the T-Bill. Noncompetitive bids
auctions allow investors to submit a bid to purchase a set dollar amount of
bills. The yield investors receive is based upon the average auction price from
all bidders.

Competitive bids are made through a local bank or a licensed broker.

Individual investors can make noncompetitive bids via the TreasuryDirect
website. Once completed, the purchase of the T-Bill serves as a statement
from the government that says you are owed the money you invested,
according to the terms of the bid.