A Treasury Bill (T-Bill) is a short-term debt obligation issued by the U.S. government with a maturity of less than one year. It is sold in denominations ranging from $1,000 to $5 million. The T-Bill doesn’t carry a stated interest rate, but it is sold at a discount, allowing investors to earn a profit when it matures at full face value. This difference between the discount price and the face value equals the return on investment for the holders.
1. How is the rate of return determined on a T-Bill?
The rate of return or the yield on a T-Bill is the difference between the purchase price and the face value, divided by the purchase price. It is indirectly proportional to the purchase price, meaning if the purchase price is high, the yield will be low, and vice versa.
2. Why are Treasury Bills considered a safe investment?
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T-Bills are considered extremely safe because they are backed by the full faith and credit of the U.S government. They are seen as risk-free investment instruments, making them highly attractive to conservative, risk-averse investors.
3. Can T-Bills be sold before they mature?
Yes, T-Bills can be sold before they reach maturity. Investors might choose to do this if they need to access their cash before the maturity date. They can sell it on the secondary market where the price may be higher or lower than the face value, based on current interest rates.
4. What influences the price of Treasury Bills?
The price of T-Bills is influenced by interest rates in the economy. When interest rates rise, the price of existing T-Bills falls and when interest rates fall, the price of existing T-Bills rises. This is because T-Bills offer a fixed return, so their yield becomes less attractive as interest rates rise.
5. How can one buy Treasury Bills?
T-Bills can be purchased through a brokerage account or directly from the U.S. government at TreasuryDirect.gov. They are sold in auctions where investors indicate the discount rate they are willing to accept; the government then awards T-Bills to the highest bidders.