Treasury bills are the money market securities that are most marketable. Their simplicity makes them quite popular. The way the U.S. government raises money from the public is precisely through treasury bills.
T-bills are securities that are short-term and mature within one year or less from the day of their issue. Typically, this type of security has maturity of three months, six months, or one year. For this reason, the purchase price smallest than their par value. The full par value is paid to the holder by the government at the date of their maturity. The received interest is the difference between the security’s purchase price and the amount that is received at maturity. A 90 day T-bill purchased at $9800 will, for example, earn the investor $200, if he hold it until maturity. Coupon bonds are different because the interest is paid on a semi-annual basis.
Treasury bills are issued at auctions through a competitive bidding process. The investor must submit a bid in order to buy a T-bill. It must be prepared in a competitive or non-competitive manner. One will receive the full amount of the security in a non-competitive bidding at the return, determined by the auction. The return that one desires to receive must be specified in a competitive bidding. One may not receive any securities if the specified return of the investor is too high.
The T-Bills are popular mainly because they are affordable money market instruments for the individual investors. They are normally issued in denominations raging from $100 to $1 million. Another good feature is that treasury bills are known to be the safest instrument. This is naturally due to the U.S. government backing. They are, in fact, risk free and exempt from the local and state taxes.
The only negative side of the treasury bills is that the return is not as high as the treasuries are among the safest instruments. Higher interest rates are given by the certificates of deposit and the corporate bonds.
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