Treasury Bills
Key Takeaways
- Treasury Bills are short-term financial instruments with a maturity period of less than a year
- T-Bills have zero-coupon rates, i.e. no interest is earned on a T-Bill investment
- Government holds treasury bills auctions on TreasuryDirect website
- Already issues treasury bills can be purchased through a broker in the secondary market
What are Treasury Bills?
Treasury Bills or T-bills are short-term financial instruments (debt instruments in this case) with a maturity period of less than a year. T-Bills are auctioned by the Reserve Bank of India at a discount to par value and are used by investors to invest their surplus at very low risk compared to other investments like stocks. T-Bills are used by the Government to acquire capital to fund the various operations when needed.
How do Treasury Bills work?
T-Bills have zero-coupon rates, i.e. no interest is earned on a T-Bill investment. Rather T-Bills are purchased at a discount to par value from RBI and the RBI promises to pay back the entire face value at the time of maturity. Based on the time of maturity, RBI auctions 14-Day and 91-Day T-Bills every week on Fridays whereas 182 and 364- Day T-Bills are auctioned every alternate week on Wednesdays.
Example of Treasury Bills:
Suppose an individual purchases a 91-Day T-Bill with a face value of Rs.100 at a discount price of Rs.92. Then at the time of maturity (i.e. 91 Days), RBI pays back the T-Bill holder Rs. 100, thus resulting in a profit of Rs.100-Rs.92 = Rs. 8 for the individual
Advantages and Disadvantages of Treasury Bills
T-bills are one of the safest financial instruments in the market. They are good for investors aiming fixed returns. But since T-bills offer a fixed interest rate, existing T-bills may become unfavourable if interest rates in the market start rising. Therefore, they have an interest rate risk.
T-bills don’t have a default risk but with lower risk, they also usually offer lower returns in comparison with corporate bonds and some other financial instruments.
| Pros | Cons |
| Zero default risk | Have an interest rate risk |
| State and local income taxes is not imposed on the interest income | Offer lower returns |
| Can be bought or sold easily in the secondary market | Leading up to maturity, it does not pay any coupon interest payments |
| Have lower minimum investment requirement ($100) | Can hinder cash flow for people requiring steady income |
How to purchase Treasury Bills?
National stock exchange(NSE) has recently launched the NSE goBID to make it easier for investors to invest in government bonds and treasury bills. Already issued treasury bills can be purchased through a broker in the secondary market. In such auctions, treasury bills are priced through bidding. Bids are generally competitive or non-competitive.
In a competitive bid, the price is set at a discount from the par value of the T-bill. This lets the buyer decide the yield he/she wishes to get. These bids are done through licensed brokers or local banks. In a non-competitive bid, investors are allowed to buy a particular dollar amount of T-bills through submitting a bid. The yield that investors get depends upon the mean auction price of all bidders. Non-competitive bids can be done through the TreasuryDirect website