Finance

Treasury Bills

Treasury Bills

Treasury Bills also known as T-Bills are government securities that are issued at zero-coupon rates or zero interest rates. T-Bills are short-term securities that have a maximum tenure of one year. They are issued at a discounted price but redeemed at face value. The longer the maturity the higher the interest received by the investor. These securities are issued by the government at a low price and short-term to fulfill the short-term requirements of the government.

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Features of Treasure Bills:

  • Treasury Bills are issued at a discounted price and redeemed at the face value.
  • They are short-term securities and so have a maturity of 1-year maximum.
  • A minimum bid price can also be invested in T- Bills.
  • They have a very low transaction cost.
  • T-Bills are issued at zero coupons (interest) rates.

Factors that affect prices of T-Bills:

  • Inflation – Inflation is the biggest factor that affects T- Bills because there are times when inflationary rates of other securities are higher than T-Bills. T-Bills are on the other hand available at a discounted prices and are hence less attractive in the market and so a loss is faced in returns of T-Bills.
  • Interest Rates – When the interest rates of the Federal Reserve are low there are additional demands for treasuries which lead to low-interest rates.
  • Maturity Period – The prices of T- Bills are affected by the maturity period. The longer the maturity more is the additional risk for the investors. A T-Bill with a higher maturity period will earn a high rate of return as compared to a lower maturity period. An example of this would be a T-Bill with a maturity period of one year would be available at $1000 whereas a T-Bill with a maturity of six months would be sold at $1200.

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Pros and Cons of Treasury Bills:

Pros:

  • Low transaction cost – The transaction cost of T-Bills is very low as compared to other securities hence even a minimum amount can be invested without no or low transaction cost.
  • Zero-coupon (interest) rates – There are no interest charges in Treasury Bills and so are known as zero-coupon bonds.
  • Short term in nature – Treasury Bills are short-term in nature. The maximum tenure or maximum maturity of the bonds is not more than one year.
  • Less risk-bearing securities – As the maturity of the bonds is not more than one year the risk to bear the security is also very less due to this.
  • Low maturity period – the maturity period of Treasury Bills is not more than one year. At present Treasury Bills are issued in three maturities – 91 days, 182 days, and 364 days.

Cons:

  • Very low rate of returns – The rate of return earned at maturity by the investors is very less as compared to other bonds or securities in the market.
  • Returns are fixed throughout the maturity period – the returns to be received are fixed throughout the maturity period and hence fewer returns are earned by the investors in Treasury Bills.
  • Limited access to withdraw money – Money cannot be withdrawn or accessed anytime during the tenure period. There is a fixed time period to withdraw money or else charges need to be paid.

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Example:

Treasury bills are issued at a discount and redeemed at the face value. For example, a Treasury Bill of Rs. 200 (face value) may be issued at Rs. 180 (Discounted price) and would again be redeemed at Rs. 200 (face value) itself, which means you purchase it at a discounted price (Rs. 180) and redeem at face value (Rs. 200) and earn a profit (Rs. 20) at maturity.

Final Thoughts:

T-Bills are quite flexible in trading. There is no default risk in T- Bills and are very affordable but on the other hand, there are limitations as well for treasury bills such as interest rate risk (when the interest rates of different securities in the market increase T-Bills are less attractive). They are a combination of low return low risk.

 

Author – Saachi Lodha

About the Author – A passionate professional with knowledge of Accounting and Finance and currently exploring Financial Risk Management (FRM) to gain knowledge and exposure. As a part of the FRM course also writing blogs to explore the field more and deep dive into the content.

Related:

US Treasury Market: How does it Work?

Treasury Inflation-Protected Securities

Treasury Bills Quotation  – How T-bill is quoted in the market

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