Treasury Bill
From Economypedia.com
A Treasury Bill is a negotiable debt obligation issued by a government. Treasury bills are considered to be short-term, as the period of maturity is one year or less. They are exempt from local and state taxes. They are the safest form of marketable investment.
Popularly known as T-bills in the US, they can be purchased in $1,000 denominations. One can purchase treasury bills amounting to a maximum of $5 million. Normally these bills attain maturity in one month, three months, six months, or a year.
The process of issuance of treasury bills is done by bidding. The holder of the bill need not pay any fixed interest. The bill holder gets a payment on the appreciation of the bond. The bills are available for sale in the secondary market. Each T-bill is authorized and identified by a singular CUSIP number.
For example, you could buy a 13-week T-bill priced at $9,700. At this point, the US government would owe you $10,000, due in three months. Thus, you are earning the difference between what you paid (the discounted value) and what the government pays you: $300. The result is the government pays a 3.09% interest rate ($300/$9,700 = 3.09%) over the tenure of three months.
The payout amount is called the face value; the purchase amount is sold at a discount rate of the face value. There is only one payout. There are no semi-annual premiums made.
T-bills are issued to fund overall operations of the federal government, and regulating money supplies in a country. The opening of TreasuryDirect has enabled the online purchase and selling of T-bills. These are transferred to the bank account of the buyer.
Along with bank deposits, treasury bills are often regarded as the risk-free rate. When calculating the capital market line, this interest rate is needed, and is represented as r sub f.
Treasury bills are different from treasury notes and treasury bonds in that they offer the shortest term. Treasury notes mature between one and ten years, while treasury bonds mature in more than 10 years.
Treasury bills were first issued in 1877 in the United Kingdom.
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Treasury Bills in the US
Treasury bills were first issued in the US in 1929. They are issued by the US Department of the Treasury, Bureau of the Public Debt.
In the US, major newspapers list the yields of T-bills. Items they list are:
- Maturity date of the bill
- Days to maturity
- Bid and ask prices
- Change in price
- Yield [1]
Types
There are different types of treasury bills depending upon the maturity period and utility of the issuance. They are ad-hoc treasury bills, 3-month, 6-month, and 12-month bills. (In the US, they are 52-week terms, while in India they are 364-day terms.)
The ad-hoc T-bills are known as cash management bills. They are not offered on a regular schedule. Their terms are variable and are often only a few days. [2]
Amounts
Treasury bills are offered in multiples of $100.
Auctions
Auctions are done online, via TreasuryDirect. All the paper bills of the past have matured. However, bidding can also be done by post or phone.
Noncompetitive bid
A noncompetitive bid offers the buyer the discount rate that is decided at the auction. They buyer is assured of receiving the desired security in the desired amount.
Competitive bid
A competitive bid involves the buyer (bidder) setting the minimum acceptable discount rate. The bidder is not assured of receiving the desired security or desired amount (if received). A competitive bid must be placed through a bank, a dealer, or a broker.[3]
TreasuryDirect
TreasuryDirect allows investors to buy and sell securities directly from the U.S. Department of the Treasury online.
In addition to treasury bills, bonds, notes, inflation-protected securities (TIPS), and Series I and EE savings bonds are available on the site. TreasuryDirect does not offer cash management bills.
Only individuals (not institutions) can hold accounts in TreasuryDirect.
Treasury Bills in India
Types
In India the treasury bills are issued by the Government of India only, not State Governments. The three types of treasury bills issued are 91-day, 182-day and 364-day bills. They are issued through auctions [4]
Amounts
The minimum amount available is for Rs. 25,000 (US $579.72, as of 7 July, 2008). They are further available in denominations of Rs. 25,000. They are redeemed at par and are issued at a discounted rate. Treasury bills in India are issued under the Market Stabilization Scheme (MSS) as well.[5]
Auctions
Auctions are held every Wednesday for 91-day T-bills. Auctions for the 182-day and 364-day T-bills are held every other Wednesday. A calendar of T-bill actions can found on the Reserve Bank of India website along with amounts to be auctioned, dates of the auctions, and payment dates (via press releases before each auction).[6]
References
- ↑ The Bond Book, Annette Thau, McGraw-Hill, 2000. ISBN 0071358625
- ↑ http://www.treasurydirect.gov/
- ↑ http://www.treasurydirect.gov/indiv/research/indepth/res_auctions_indepth.htm
- ↑ http://www.rbi.org.in/scripts/FAQView.aspx?Id=48.
- ↑ http://www.rbi.org.in/scripts/FAQView.aspx?Id=48.
- ↑ http://www.rbi.org.in/scripts/FAQView.aspx?Id=48
- Investopedia entry on treasury bills. Retrieved on July 7, 2008.
- Business Dictionary entry on treasury bills. Retrieved on July 7, 2008.
- Treasury Direct website.
- Brealy / Myers / Allen (2006). Corporate Finance, Eighth Edition
- Bureau of the Public Debt website. Retrieved on July 7, 2008.
External links
- Financial market article in Economy Watch
- Article in Investopedia Buy Treasuries Directly From The Fed Retrieved on July 7, 2008.
Further Reading
Blogs
- Banddad Blog - Yen and T-Bill
- Brad Setser: Follow the Money
- Getting to Know the Money Market
- World Business News
See also
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Categories: Treasury Securities | Investing | Government debt | Country-specific economics | Macroeconomics | Economic policy
