Financial Management

Treasury Bills and Commercial Paper Explained

Treasury Bills: The Basics

Treasury bills, often known as T-bills, are short-term financial securities issued by both the federal and provincial governments having maturities of up to one year. T-bills are used to finance around 27 per cent of the national debt.

Here are some of the fundamentals of Treasury bills:

30 days, 60 days, 90 days, 182 days, and 364 days are the most typical periods for federal and provincial T-bills.

Treasury bills pay no interest. They are instead sold at a discount and redeemed for their face value. This adheres to the maxim “buy low, sell high.” The yield or rate of return is the proportion by which the value of a T-bill increases between the date of sale and the date of redemption. Mathematically, the yield is computed in the same manner as an interest rate, and is consequently substituted for the discount rate in all simple interest calculations.

A Treasury bill’s face value (also known as par value) is the maturity value, payable at the end of the period. It incorporates both the primary and the yield.

T-bills are not required to be held by the initial investor for the duration of their tenure. Through secondary financial markets, an investor may sell a T-bill to another investor at any time throughout its tenure. T-bill yields prevalent at the time of sale are utilised to determine the price.

Commercial Papers – The Basics

The only difference between commercial paper and Treasury bills is that major corporations rather than the government issues commercial paper.

It is an alternative for major enterprises to short-term bank borrowing. The majority of these significant corporations have strong credit ratings, which means that investors are exposed to a little risk that the face value will not be repaid at maturity.

Commercial papers have the same characteristics as Treasury bills. The only significant changes are in the term and yield:

The terms are often fewer than 270 days, but they can range between 30 and 364 days. The most prevalent terms are 30, 60, and 90 days.

Since firms incur a greater risk of default than governments, commercial paper yields tend to be slightly more than those of Treasury bills.

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