What Is A T-bill?

The T-Bill

A T-bill is a debt purchased from the U.S. Government.  They are commonly referred to as Treasury notes as well as T-bills as they are issued from the Treasury department of the United States.  A T-bill represents an amount bought from the government as a sort of loan.  The government issues the T-bill to the investor and agrees to pay the amount back with interest.  In this way the government, or more precisely the Federal Reserve, is able to secure money to operate the country´s budget.  The investor is allowed to purchase the T-bill for guaranteed interest payments when the Treasury bill matures.  It is an excellent way for the Federal government to raise money while a good investment for the buyer as the amount is borrowed plus interest is guaranteed by the U.S. government meaning the payout is a very safe investment unlike stocks or mutual funds.  A T-bill is referred to as the long bill as it has a maturity of 30 years.  Meaning that the amount it is guaranteed for, plus the interest cannot be cashed out for 30 years from its date of purchase.

T-Bill Uses

The vast majority of T-bills are purchased by banks, mutual funds, and international governments.  This is largely because for the common investor 30 years can be a long time to wait.  For governments, it is seen as good investment in a stable world economy.  As of September 2009, China is the largest holder of U.S. Treasury Notes with an estimated maturity value of more than 700 billion U.S. dollars.  Domestic banks as well as large mutual funds also purchase large amounts of T-bills.  This is done to secure long-term assets in a very safe manner, meaning low-risk to collect the return on the investment.

How T-Bills Work

A T-bill transaction works based on auction.  Meaning the price of a T-bill issued this week is not set but will be based on demand from buyers.  Each Thursday the U.S. Treasury offers T-bills to consumers, banks, international governments, and mutual funds alike.  Based on what someone is willing to purchase the face value of t-bill for combined with its coupon amount, the maturity interest that will be collected after the 30 year time period, determines the sale price.  The interest rates on T-bills are not high, but the fact that the return is all but 100% guaranteed to be paid makes treasury notes an attractive option.

Related posts:

1. What are Government Bonds?
2. What Is The Interest Rate On A Bond?
3. What Is A Treasury Bond?
4. What Are Treasury Bonds?
5. What Are Tax Free Bonds?