TREASURY BILLS BASIC INFORMATION AND TUTORIALS

What Are Treasury Bills (T-Bills)?


U.S. Treasury bills (T-bills, or just bills, for short) are the most marketable of all money market instruments. T-bills represent the simplest form of borrowing. The government raises money by selling bills to the public.

Investors buy the bills at a discount from the stated maturity value. At the bill’s maturity, the holder receives from the government a payment equal to the face value of the bill. The difference between the purchase price and the ultimate maturity value represents the investor’s earnings.

T-bills with initial maturities of 28, 91, and 182 days are issued weekly. Sales are conducted by an auction where investors can submit competitive or noncompetitive bids.

A competitive bid is an order for a given quantity of bills at a specific offered price. The order is filled only if the bid is high enough relative to other bids to be accepted. If the bid is high enough to be accepted, the bidder gets the order at the bid price.

Thus, the bidder risks paying one of the highest prices for the same bill (bidding at the top), against the hope of bidding “at the tail,” that is, making the cutoff at the lowest price.

A noncompetitive bid is an unconditional offer to purchase bills at the average price of the successful competitive bids. The Treasury ranks bids by offering price and accepts bids in order of descending price until the entire issue is absorbed by the competitive plus noncompetitive bids.

Competitive bidders face two dangers: They may bid too high and overpay for the bills or bid too low and be shut out of the auction. Noncompetitive bidders, by contrast, pay the average price for the issue, and all noncompetitive bids are accepted up to a maximum of $1 million per bid.

Individuals can purchase T-bills directly at the auction or on the secondary market from a government securities dealer. T-bills are highly liquid; that is, they are easily converted to cash and sold at low transaction cost and with little price risk.

Unlike most other money market instruments, which sell in minimum denominations of $100,000, T-bills sell in minimum denominations of only $10,000. While the income earned on T-bills is taxable at the Federal level, it is exempt from all state and local taxes, another characteristic distinguishing T-bills from other money market instruments.