Treasury bills are a short term government treasury security which has a maturity of less than a year. T-bills do not generally pay coupons or interest much like zero coupon bonds.
Treasury Bills (t bills) Explained
Because treasury bills do not pay coupons they are sold at a discount in an auction held by the Bureau of Public Debt. A t-bill is essentially risk free and highly liquid due to its short term nature. There are four different types of t bills which are sold according to their respective maturities. T bills are sold with maturities of 28 days, 91 days, 182 days, and 364 days. T-bills are also sold in certain denominations which range from $10,000 to $1 million.
Treasury Bill (t bill) Formula
Treasury bill rates can be calculated using the following formula:
((Face Value – Purchase Price)/Face Value) * (360/Days until Maturity) = Yield or Rate
Treasury Bills (t bills) Example
A $10,000 face value 91 day (3 month) t bill is currently being sold at auction. Lumber Co. purchases this t bill for a discount at a price of $9,833. What is the yield on this particular treasury bill at the time of sale.
(($10,000-$9,833)/$10,000)* (360/91) = Yield
(.0167)* (3.956) = Yield
Yield = .0661 or 6.61%
Treasury Inflation Protected Securities (TIPS)