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A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.

The U.S. government issues T-bills to fund various public projects, such as the construction of schools and highways. When an investor purchases a T-Bill, the U.S. government is effectively writing an IOU to the investor. T-bills are considered a safe and conservative investment since the U.S. government backs them.

T-bills are issued at a discount from the par value (also known as the face value) of the bill, meaning the purchase price is less than the face value of the bill. For example, a $1,000 bill might cost the investor $950 to buy the product.

When the bill matures, the investor is paid the face value—par value—of the bill they bought. If the face value amount is greater than the purchase price, the difference is the interest earned for the investor. T-bills do not pay regular interest payments as with a coupon bond, but a T-Bill does include interest, reflected in the amount it pays when it matures.

Advantages and Disadvantages of T-Bills

Treasury Bills are one of the safest investments available to the investor. But this safety can come at a cost. T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates are rising, existing T-bills fall out of favor since their rates are less attractive compared to the overall market. As a result, T-bills have interest rate risk meaning there is a risk that existing bondholders might lose out on higher rates in the future.

Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit. Since Treasury bills don't pay periodic interest payments, they're sold at a discounted price to the face value of the bond. The gain is realized when the bond matures, which is the difference between the purchase price and the face value.

However, if they're sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. In other words, if sold early, the sale price of the T-bill could be lower than the original purchase price.

Pros and Cons of T-Bills

Pros

• Zero default risk since T-bills have a U.S. government guarantee
• Interest income is exempt from state and local income taxes but subject to federal income taxes
• Investors can buy and sell T-bills with ease in the secondary bond market

Cons

• T-Bills may offer low returns compared with other debt instruments as well as when compared to certificates of deposits (CDs)
• The T-Bill pays no coupon — interest payments — leading up to its maturity
• T-bills can inhibit cash flow for investors who require steady income
• T-bills have interest rate risk, so, their rate could become less attractive in a rising-rate environment

What Influences T-Bill Prices?

T-Bill prices fluctuate similarly to other debt securities. Many factors can influence T-Bill prices, including macroeconomic conditions, monetary policy, and the overall supply and demand for Treasuries.

What Kind of Interest Payments Will I Receive If I Own a Treasury Bill?

The only interest paid will be when the bill matures. At that time, you are given the full face value. T-bills are zero-coupon bonds that are usually sold at a discount and the difference between the purchase price and the par amount is your accrued interest.

If you're not sure if a T-bill is right for you or need help purchasing, please contact an advisor at Forward Investment Services.