What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset (2024)

FAQs

What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset? ›

Treasury bills, or T-bills, are a straightforward, short-term investment option, maturing in one year or less. Investors purchase them at a cost below their face value, and when the bond reaches maturity, the U.S. government repays the full face value.

T-bonds have a low yield, or return on investment. A little bit of inflation can erase that return, and a little more can effectively eat into your savings. That is, an investment of $1,000 in a T-bond for one year at 1% interest would get you $1,010.

The following are the disadvantages of T-bills: The returns on T-bills are generally lower than other investments, such as stocks or bonds. This means that investors looking for high returns may not find T-bills attractive.

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.

Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.

The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.

Treasury bonds, notes, or bills sold before their maturity date could mean a loss, depending on bond prices at the time of the sale. Simply put, the face value is only guaranteed if the Treasury is held until maturity.

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.

Key Takeaways

Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT. Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.

Can you sell T-bills before maturity? ›

You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)

The minimum amount that you can purchase of any given Treasury Bill, Note, Bond, TIPS, or FRNs is $100.

It pays interest twice a year and face value at maturity. The money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year.

It can only pay bills as it receives tax revenues. If the revenue isn't enough, the Treasury Secretary must choose between paying federal employee salaries, Social Security benefits or the interest on the national debt.

Reinvest or Redeem Treasury Bills

If you hold a bill in TreasuryDirect, when the bill matures, you can reinvest it or redeem it.

T-bills work differently than longer-term fixed-income investments, which pay interest semiannually until maturity. You buy T-bills at a discount from the face value — known as the price before par. Your interest is the difference between the discounted price and the par value at maturity.

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

However, CDs and Treasuries are fixed income investments and subject to similar risks as other fixed income investments. For example, if interest rates rise, the price of a CD or Treasury will fall and if you need the investment prior to maturity and have to sell it, you may lose money.

Some millionaires keep their cash in Treasury bills that they keep rolling over and reinvesting. They liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S government to raise money. Treasury bills are usually purchased at a discount.

Treasury bonds are widely considered a risk-free investment because the U.S. government has never defaulted on its debt. However, investors should understand that even U.S. government bonds have interest rate risk. That is, if market interest rates rise, the prices of these bonds will fall, as they did throughout 2022.