November 10, 2008 by admin
Treasury Bills
What are Treasury Bills (T-Bills)?
Treasury Bills, or more commonly known as T-Bills, are short term government debt instruments, issued at a discount to par and mature within 1 year. The largest purchase volumes come from primary dealers and other large banking or financial institutions.
T-Bill issuance is a form open market operations employed by the Federal Reserve to control the money supply. Large T-Bill issuances are seen as a means to reduce the money supply, thereby reducing liquidity to control inflation. When the treasury buys T-Bills back, their aim is to increase the money supply and decrease interest rates.
Similar to discount notes and zero-coupon bonds, t-bills do not make periodic interest payments and mature at par. The interest component on the security is paid at maturity, equaling the par value of the bond minus the purchase price. For example, if you purchased a bond with a par value of $100 at $95, you would receive $5 of interest.
Additionally, interest income derived from the T-Bill is exempt from state & local taxes but is subject to federal taxes.
T-Bill Yield Calculation
To calculate the yield of the T-Bill, you can use the following formula:
When are T-Bills Sold?
Treasury bills are auctioned off weekly with maturities of 4 weeks (1 Month), 13 weeks (3 Months), 26 weeks (6 Months), and 52 weeks (1 year). The auction can be accessed through the TreasuryDirect website and requires a minimum bid of $100. The auction is a single price dutch auction which will guarantee a price equal to the lowest bid that will fill the supply being offered. To prevent a large buyer from winning the entire offering, there is a 35% maximum allotment to any one single buyer.
There will be overlap between the maturity dates issued by these auctions. For example, suppose a 3 month T-Bill auction from today has the same maturity date as a 6 month t-bill issued 3 months ago. In this case, the 3 month T-Bill will be considered a re-opening of the 6 month T-Bill issued 3 months ago. Therefore, they will share the same CUSIP, or security identifier.
The treasury also issues cash management bills (CMB) which have non-standard maturities. They are issued to meet temporary short term funding needs of the treasury and have maturities that range from a few days out, up to a couple months. Yields on CMB's are higher than the typical T-Bill issuance due to the fact that there are not as many buyers for these securities.
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