A Treasury Bill (T-Bill) is a short-term U.S. government debt security with maturities of one year or less, sold at a discount and redeemed at face value upon maturity.
A Treasury Bill, commonly referred to as a T-Bill, is a short-term debt obligation issued by the U.S. Department of the Treasury. These securities mature in one year or less, making them highly liquid and low-risk investments. Unlike traditional bonds, T-Bills do not pay periodic interest; instead, they are sold at a discount to their face (par) value. The difference between the purchase price and the maturity value represents the investor's earnings. Due to their short maturities and backing by the U.S. government, T-Bills are considered virtually risk-free in terms of credit risk. In finance and wealth management, Treasury Bills serve as fundamental instruments for cash management, liquidity preservation, and as benchmarks for short-term interest rates. They are used by investors to park funds safely, hedge interest rate exposure, or as building blocks in conservative fixed-income portfolios. Their yields fluctuate with monetary policy and market demand, reflecting the prevailing economic conditions.
Understanding Treasury Bills is essential in investment strategy because they provide a safe, liquid investment option that can balance risk in a portfolio. They serve as a cash-equivalent asset, enabling wealth managers to manage liquidity effectively and meet short-term capital needs. From a reporting perspective, T-Bills are generally straightforward to account for, with clear maturity dates and predictable returns. In tax planning, T-Bills offer advantages as the interest income, reflected by the difference between purchase and face value, is subject to federal income tax but exempt from state and local taxes. This tax treatment can be beneficial in jurisdictions with high state tax rates. Their predictable, low-risk nature makes T-Bills a strategic tool in governance to maintain portfolio safety and capital preservation amid market volatility.
Suppose an investor buys a $10,000 Treasury Bill with a 6-month maturity for $9,800. At maturity, the investor receives $10,000. The difference of $200 represents the earned interest over six months. The annualized yield can be calculated as: ($200 / $9,800) × (12 / 6) = approximately 4.08%. This simple example illustrates the discount and yield mechanism of T-Bills.
Treasury Bill vs. Treasury Note
While Treasury Bills are short-term securities with maturities of one year or less and sold at a discount without periodic interest payments, Treasury Notes are medium-term securities typically maturing between 2 and 10 years and pay semi-annual interest. T-Bills are used primarily for liquidity and short-term needs, whereas Treasury Notes balance income with moderate duration risk.
How does a Treasury Bill generate income if it does not pay interest?
A Treasury Bill is sold at a discount below its face value, and the income is the difference between the purchase price and the amount received at maturity. This difference effectively serves as the interest earned.
Are Treasury Bills subject to state and local taxes?
No, the income from Treasury Bills is subject to federal income tax but is exempt from state and local income taxes, making them tax-efficient for investors in high-tax states.
What is the typical maturity range for Treasury Bills?
Treasury Bills typically mature in a range from a few days up to one year, with common maturities of 4, 13, 26, or 52 weeks.
