What are treasury bills?

Where do you put your savings? If your bank offers a savings account or money market account that pays a good rate, this may be excellent, but lots of banks don’t. Most people want maximum safety and considerable flexibility. A suitable alternative is treasury bills (t-bills). This article will illustrate what treasury bills are.

What are treasury bills?

Treasury bills are commonly known as t-bills, and are issued by the government. They are short-term securities that mature in one year or less as from the issue date. T-bills are short-term borrowings of the government from the public. They are purchased for a price that is less than their par value, and are sold at a discount. T-bills pay face (par) value at maturity.
Who can purchase T-bills? T-bills can be purchased by anyone including firms, banks, companies, corporate bodies, individuals and financial institutions except state government. The central bank issues t-bills on behalf of the government, and these are sold on auction at different discount rates, depending on the bids. The best offers are accepted from the bids.
When are they payable? When treasury bills mature, the government pays the holder the full par value. T-bills are zero coupon bonds, and therefore do not pay interest. In actual fact, your interest is the difference between what you get at maturity and the purchase price of the security.

Treasury notes and bonds versus T-bills

While T-bills mature in less than one year, treasury notes (T-notes) represent debt by the government, but their maturity are from two to ten years. However, unlike treasury bills, treasury notes pay interest semi-annually. Treasury bonds (T-bonds) mature in twenty or thirty years, and they give interest every six months, like treasury notes.

Advantages of treasury securities

Treasury securities are the safest investments you can make; you can buy them for situations where you need a big chunk of funds. Longer-term treasury notes and bonds, are good in instances where you know you are going to need the money on a particular date, maybe after the next five years. Any time you know you are going to make a payment for college tuition, house closing, or car down payment, etc, then, treasury notes are just the answer.

Conclusion

The biggest reason why T-bills are so popular is because they are affordable to individual investors compared to other money market instruments. T-bills are not only safe, but they are considered risk-free and are exempted from state and local taxes. The only downside to t -bills is that you won’t get a great return on your investment. The returns are generally lower than those for longer-term investments. They are, however, ideal investments when you can't afford to risk your money.