Treasury bills  - What are T-bills all about?

The United States federal government through the Department of Treasury issues many types of debt securities with the obvious intention of funding its current operations. Of course, these debt securities are backed by the federal government, which is as close to a 100% iron-clad guarantee that the holders will get paid on time. One of these debt securities is the Treasury bills or T-bills.

T-Bills - A General Definition

As can be concluded, T-bills are considered the safest investments even when the US government is facing serious fiscal difficulties due to the lingering effects of the Great Recession, among other factors. If the federal government will be unable to pay for its obligations especially the debt securities it has issued, you will be worrying far more about basic survival needs for food than recouping your investments.

T-bills are issued in increments of $1,000 with investors able to purchase the securities for up to $5 million at one time. As such, you can purchase Treasury bills even when you belong to the middle-class bracket because of their relative affordability as compared to other investments with similar low risks.

Treasury Bills - Maturity Period

T-bills work along similar principles as other treasury securities including treasury bonds and savings bonds. However, you will observe that T-bills have shorter length of maturity period than these other treasury securities at just 13, 26 and 52 weeks. Take note that the longest maturity period for T-bills is just under a year, thus, making them suitable for short-term investments with relatively good returns and low risks.

Also, Treasury bills are always sold at a discount of their face value - or to put it another way, the purchase price is always lesser than the amount stated on the certificate. For example, if the T-bill had a $1,000 face value, you can purchase it for $900 or a discount of $100.

This is because T-bills do not come with interest rates as income after the maturity period has lapsed. Your income comes in the discount of $100 that you earned a few weeks ago, say, 13 weeks prior to the maturity date.

Bidding Process

Another notable aspect of T-bills is the fact that these securities are issued via a competitive bidding process known as an auction. This is also where the discount is determined so that investors already know their interest income, so to speak, even before the Treasury bills come into their actual possession. If you are interested in acquiring T-bills as part of your short-term investment portfolio, you should place your competitive bid with a broker or banker.

The T-bills can also be acquired via a non-competitive process. However, you are constrained to accept whatever discount rate has been set during the auction. For example, if the auctioneers determined that the purchase price for the T-bills is $975 for the $1,000 securities, then you will only enjoy a $25 profit on maturity.

Another desirable feature of T-bills is their availability for purchase in an online site specifically the TreasuryDirect. The funds for purchase are withdrawn and the face value of the T-bills is deposited directly into the savings account, which means higher interest income on it.

No matter which of these ways of dipping your hands into Treasury bills you choose, one thing is clear - you are assured of a profit.