Treasury Bills

Lesson

Treasury bills, or T-bills, are short-term debt securities issued by the U.S. government. They are considered one of the safest investments available, as the full faith and credit of the U.S. government backs them. T-bills are sold at a discount to their face value and mature in less than one year, making them an attractive option for investors looking for a low-risk, short-term investment.

Practice Question #1

Which of the following best describes Treasury bills?

A) Long-term debt securities issued by the U.S. government

B) Intermediate-term debt securities issued by the U.S. government

C) Short-term debt securities issued by the U.S. government

D) Unsecured debt issued by corporations

Select an option above to see an explanation here.

A) Treasury bonds are long-term debt securities issued by the U.S. government. B) Treasury notes are intermediate-term debt securities issued by the U.S. government. C) Treasury bills are short-term debt securities issued by the U.S. government. D) Commercial paper is unsecured debt issued by corporations.

Terms

Treasury bills (T-bills):: Short-term debt securities issued by the U.S. government with maturities of less than one year.
Face value:: The amount a bond or other debt security will be worth at maturity.
Discount:: The difference between the face value of a security and its purchase price.
Maturity:: The date when a debt security becomes due and payable.
Yield:: The return on an investment, expressed as a percentage of the investment's cost.

Practice Question #2

How are Treasury bills sold to investors?

A) At a discount to face value

B) At face value

C) At a premium to face value

D) At the current market price

Select an option above to see an explanation here.

A) Treasury bills are sold at a discount to their face value. B) Treasury bills are not sold at face value. C) Treasury bills are not sold at a premium to face value. D) Treasury bills are not sold at the current market price.

Do Not Confuse With

Treasury notes:: Intermediate-term debt securities issued by the U.S. government with maturities of 2-10 years.
Treasury bonds:: Long-term debt securities issued by the U.S. government with maturities of 10-30 years.
Certificates of deposit (CDs):: Time deposits issued by banks with a specified maturity date and interest rate.
Commercial paper:: Short-term, unsecured debt issued by corporations.

Practice Question #3

What is the primary difference between competitive and non-competitive bidding for Treasury bills?

A) Competitive bidding requires a minimum investment amount, while non-competitive bidding does not.

B) Non-competitive bidding requires a minimum investment amount, while competitive bidding does not.

C) Competitive bidding allows the investor to specify a desired discount rate, while non-competitive bidding requires the investor to accept the average discount rate determined at auction.

D) Non-competitive bidding allows the investor to specify a desired discount rate, while competitive bidding requires the investor to accept the average discount rate determined at auction.

Select an option above to see an explanation here.

A) Both competitive and non-competitive bidding have minimum investment amounts. B) Both competitive and non-competitive bidding have minimum investment amounts. C) Competitive bidding allows the investor to specify a desired discount rate, while non-competitive bidding requires the investor to accept the average discount rate determined at auction. D) Competitive bidding, not non-competitive bidding, allows the investor to specify a desired discount rate.

Historical Example

In the early 1980s, the U.S. government faced a significant budget deficit, leading to an increase in the issuance of Treasury bills. As a result, T-bill yields reached record highs, with the 3-month T-bill yield peaking at over 16% in 1981.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

An investor looking for a safe, short-term investment might choose to purchase a 6-month Treasury bill with a face value of $10,000 at a discount of 1%. The investor would pay $9,900 for the T-bill and receive $10,000 at maturity.