Financial Management

Introduction to Treasury Bills | Duration of Issue

What are Treasury Bills?

Treasury bills are instruments issued by the government to finance its expenditures.

They are short-term debt securities with a stated maturity of six months or less and a coupon rate that fluctuates relative to other securities.

In the Treasury bill contract, the government promises to pay the holder a fixed amount called the face value at the maturity date of the Treasury bill.

T-bills are issued by the U.S. Department of the Treasury to finance the federal government’s borrowing needs. T-bills are a type of U.S. dollar government security. Treasury bills can be held as a cash reserve or a method to earn interest. T-bills are generally offered at a fraction of their face value.

Duration of Issue of T-Bills

Treasury bills are issued for maturities of 91- and 182 days. T-bills are an extremely liquid investment of the highest quality. It bears no interest rate, and the holder of these bills does not get any interest check. These are sold at a discounted rate.

T-Bills are highly marketable securities but do not redeemable until the maturity date. The interest income received from the treasury bills is the difference between the discount rate at which securities are issued and the par value of the securities is taxed as ordinary income. The lower the price of the bills are higher the yield of maturity.

Treasury bills have maturities of three, six and twelve months and are issued in the denomination of $1000. The three-month treasury bills refer to 91-day or 13-weeks bills, and six-month maturity bills may also refer to 182- days bills or 26-week bills. Treasury bills are the deal in the money market.

In the new money market 

T-bills are issued by the U.S. treasury, which uses the Federal Reserve banks as agents. Under this market treasury, the bills are issued for the maturity period of three months and six months at a weekly auction. These bills have a maturity period of one year and are sold at monthly auction. Interest income earned from T-bills is exempt from local and state taxes but subject to federal income taxes.

U.S. Government does not call the T-bills from the holder before the maturity date. The Treasury bills are U.S. government securities and might be quoted as:-

Bid                  Ask

5.85                 5.70

The bid is higher than the Ask since these numbers show that the treasury securities price is a face value discount. The asking price of treasury bills securities shows that if the bills are purchased at the ask price and held to maturity, the yield on investment, calculated at an annual rate, is 5.80%.

A basis point for U.S. Treasury securities is calculated for the one year, 182-day maturity or 91-day maturity are as follows:-

A basis point of a Treasury bill is equal to 1/100 of 1% par value (0.01%). We calculate for a one-year $10000 US treasury bill, one basis point equal to

$10000*.0001= $ 1.00

For a one-year $1 million treasury bill, a basis point will be equal to-

$1,000,000*.0001= $100 basis point per year.

For a $1 million treasury bills, 182- days maturity period

$1,000,000*.0001= $100

$100/2= $50 basis point for 182-days maturity

For a $1 million T- bill with a 91-days maturity period, a basis point would be equal to-$1,000,000*.0001= $100

100/4 =$25 basis point for 91- days’ bills

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