Treasury Bills

Topics In Order:

  • Quickfacts
  • Where to Purchase?
  • Durations
  • Bidding Rules
  • After-Sale/Maturity Options
  • Purchase Price Calculation (this section is a bit more advanced)

 

 Quick Facts: 

  • Bills are only issued in electronic form, due to a desire by the U.S. government to conserve natural resources.
  • Treasury Bills only pay interest at maturity; however, they can, and often are, sold before the final maturity date.
  • Treasury Bills can be purchased at a minimum of $100.00, and can be purchased in further multiples of $100.00. The low-level initial investment required, marked by the short maturity date, makes these treasury bills ideal for those without means.
  • 52-week bills are auctioned for purchase every 4 weeks, while all other bills are auctioned every week.

    

Specifications:  
Buying These bills are typically bought at a discount from the face value of the bill. Meaning that if you bought a $100 face value bill, you would pay $70.00 for it; however, the discount is on a sliding scale. They can be bought through one of the proceeding websites, or they can by bought through a bank or broker.
Selling When one buys a treasury bill at a discount, he or she will then sell it for the full face value. Using the example above, if one bought a bill for $70.00 then he or she would eventually sell it for the face value of $100.00 when it matured.    
Maturity Treasury Bills have varying maturity deadlines. Some can mature in a few weeks, while others can take as long as 52 weeks to mature. Those that take longer to mature, will pay more.

 

Where to Purchase?

    Treasury bills can be bought at a variety of locations, such as at TreasuryDirect or Legacy Treasury Direct. With both of these government programs, there some advantages and disadvantages; of course, TreasuryDirect offers the widest range of options for maturity and buying medium. It's clear that buying treasury bills from a bank or broker offers one the most freedom, but TreasuryDirect keeps the process simple, and allows one to buy these bills online from the comfort of your own home, and they won't charge a brokerage fee.

    One may, as previously hinted, buy treasury bills, notes, bonds, and TIPS through one's bank, or services such as Fidelity and Fmsbonds, but these institutions charge brokerage fees and will therefore decrease one's earnings when it does come time to sell.

 

Durations:

Durations (weeks):

 Bank/Broker:    Treasury Direct: Legacy Treasury Direct:
4 Yes Yes No
13

Yes

 Yes Yes
26 Yes Yes Yes
52 Yes Yes No
cash management bills Yes No No

 

Bidding Rules:

  •     Noncompetitive Bidding: When one purchases a Treasury Security in this manner at an auction, one is agreeing to pay the accepted discount rate at the auction. These securities are great because they guarantee you the security you want, for the price you want.
  •     Competitive Bidding: When purchasing this type of Treasury Security, you specify the discount rate you're willing to accept.     
    Bid Accepted: Because....
    Yes The bid for the full amount will be accepted if the rate you specify is less than the discount rate set by the auction.
    Yes The bid for less than the full amount will be accepted if your bid is equal to the high discount rate.
    No The bid will be rejected if the rate you declare is higher than the discount rate set by the auctioneer(s).
     

 

After-Sale/Maturity Options:

Institution: Action:
Treasury Direct One can either redeem the security, or use the proceeds to reinvest in another security, of the format, for the same maturity.
Legacy Treasury Direct One can either redeem the security, or use the proceeds to reinvest in another security, of the format, for the same maturity.
Bank/Broker Options vary depending on which bank you have, or who your broker is. In order to understand your options, you must consult your bank or broker.
 

  

Purchase Price Calculation Formulas:

P = A (1 -- ((R x T) / 360))

where: P = Price of bill with discount (also known as the "principal investment"); A = Face value of bill; R = Discount rate (as a decimal); T = Number of days to maturation

 

1. Example (at 0.27% discount and 52-week maturation):          

P = $300(1 -- ((.0027 x 364) / 360))

P = $299.18