Treasury Bill

A Treasury bill (T-bill) is a short-term, marketable debt security issued by the U.S. Treasury. A bill does not pay a periodic coupon. It is sold at a discount or at face value, and Treasury pays its face value at maturity. The difference between the purchase price and face value is the investor’s interest when the bill is held to maturity.

TreasuryDirect currently lists regular bill terms of 4, 6, 8, 13, 17, 26, and 52 weeks. Treasury may also issue Cash Management Bills with irregular terms when its short-term cash needs require them.

Key Takeaways

• T-bills mature in one year or less and do not make semiannual coupon payments.
• A bill’s quoted bank discount rate is not the same as the return earned on the cash invested.
• Noncompetitive bidders accept the auction result; competitive bidders specify a discount rate subject to auction limits.
• Holding a bill to maturity avoids uncertainty about its resale price, but not inflation or reinvestment risk.
• The bill’s term should be matched to the date the cash is needed, not selected from yield alone.

How Treasury Bills Work

Treasury announces an auction for a particular bill term and CUSIP. Investors may submit noncompetitive bids through TreasuryDirect or an eligible bank, broker, or dealer. Competitive bids are submitted through banks, brokers, or dealers.

A noncompetitive bidder agrees to accept the auction’s high discount rate. A competitive bidder states the discount rate it will accept, and the bid may be fully accepted, partially accepted, or rejected. TreasuryDirect currently lists a $100 minimum and $100 increments, but purchase limits, schedules, and account eligibility should be checked before an auction.

Regular 4-, 6-, 8-, 13-, 17-, and 26-week bills are generally auctioned weekly. The 52-week bill is generally auctioned every four weeks. Cash Management Bills do not follow a regular schedule and are purchased through a bank, broker, or dealer rather than TreasuryDirect.

Discount Pricing and Yield Conventions

Treasury’s simplified bill-price formula is:

Where:

• P is the purchase price.
• F is face value.
• d is the annualized bank discount rate in decimal form.
• t is the number of days to maturity.

The bank discount convention uses face value in the denominator and a 360-day year. An investment-rate calculation instead compares the dollar return with the smaller purchase price. A bond-equivalent or effective annual yield may use still another convention. Two yields should not be compared until their day count, compounding, and denominator are aligned.

Worked Example

Assume a 91-day bill has a $10,000 face value and a 4.80% bank discount rate. The indicated price is:

If held to maturity, the investor receives $10,000, so the dollar interest is $121.33. A simple annualized investment-rate approximation is:

The 4.80% auction discount rate and the 4.93% investment-rate approximation describe the same cash flows using different conventions. The example excludes transaction costs, taxes, settlement details, and reinvestment after maturity.

Treasury Bill vs. Note vs. Bond

How to Evaluate a Treasury Bill

Start with the cash requirement. A bill that matures just before a known payment date may be more useful than a slightly higher-yielding bill that matures too late or forces an early sale.

Then verify:

1. Maturity date: Confirm the actual issue and maturity dates, not only the term label.
2. Yield convention: Compare investment rates with investment rates, not a bill discount rate with a compounded deposit yield.
3. Purchase channel: TreasuryDirect and brokerage accounts differ in auction access, resale process, settlement, and cash handling.
4. Reinvestment plan: A bill stops earning interest at maturity. Decide where proceeds will go before that date.
5. Tax and account treatment: Treasury interest is generally subject to federal income tax and exempt from state and local income taxes, but holder and account circumstances can matter.

Risks and Limitations

• Reinvestment risk: A maturing bill may have to be reinvested at a lower rate.
• Inflation risk: Face value can be repaid while the cash buys less than expected.
• Market-price risk: Selling before maturity can produce a gain or loss as market yields change.
• Liquidity and execution risk: Broker spreads, order timing, transfer restrictions, and settlement can affect proceeds.
• Opportunity-cost risk: A fixed bill return may lag rates available later or returns on riskier assets.
• Operational risk: Incorrect funding, reinvestment, bank-account, or maturity instructions can interrupt the intended cash plan.

U.S. government backing addresses Treasury’s contractual payment obligation. It does not guarantee a stable resale price, a positive inflation-adjusted return, or suitability for a particular investor.

Official Sources

• TreasuryDirect: Treasury Bills lists current terms, auction frequency, purchase limits, tax treatment, and Cash Management Bill access.
• TreasuryDirect: Understanding Pricing and Interest Rates explains discount pricing for bills.
• TreasuryDirect: Buying a Treasury Marketable Security explains competitive and noncompetitive auction access.

Related Terms

• Treasury Securities
• Treasury Note
• Treasury Bond
• Bid-to-Cover Ratio
• Bond Equivalent Yield
• Bond Auction

FAQs

This article is educational and does not recommend a Treasury security, auction bid, account, or maturity. Verify current auction terms and tax treatment with official sources and qualified advisers where appropriate.