Treasury Bills

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% 