What are Treasury Bills (T-Bills)?

//What are Treasury Bills (T-Bills)?
What are Treasury Bills (T-Bills)? 2017-10-10T16:57:17+00:00

Definition: US Treasury Bills, often called T Bills, are short-term debt instruments issued and backed by the US government used to finance government operations. In other words, they are IOUs with a maturity date of less than one year offered to the financial markets by the US government in an effort to fund its activities.

What Does Treasury Bills Mean?

What is the definition of treasury bill? T-bills are popular in the financial world because of their lack of risk. Since they are fully backed by the U.S. government, there is no risk that they will default. These debt instruments are issued with different maturities all less than one year in denominations of $1,000 increments up to $5M.

Unlike other debt securities, T bills don’t offer a periodic interest payments; instead, they are sold at a discount (price below the par value) and the investor realizes a profit when he or she sells it for the face value at maturity. Investors also tend to follow these investments to analyze interest rates.

Since T-bills are fully backed by the US Government, they are considered to be one of the safest fixed income investments available in the financial markets worldwide. Even though they offer a low yield, the degree of security they provide makes them attractive to many different investors. As an added bonus to investors, returns earned from T-bills are tax-exempt on a state and municipal level.

Let’s look at an example.

Example

Mrs. Harrison is a 62 years old woman living in Los Angeles. She has a daughter who is getting married soon. Harrison has some savings that she wants to give her daughter as a wedding gift. Since the wedding is in 1 year, she wants to invest the money wisely to increase the size of her gift as much as possible, but she’s scared that she might lose money by investing in the stock market.

Thus, Mrs. Harrison buys a 1-year $1,000 treasury bill for $970. She holds onto this investment for one year and turns it in at maturity for $1,000. Harrison didn’t receive any interest payments from the investment all year. Instead, she realized a $30 gain the sale of the bill at maturity.

Summary Definition

Define Treasury Bills: T bill means a debt security issued by the federal government to fund public projects or governmental expenditures.