Financial Management

Introduction to Treasury Bills

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

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 do not get any interest check. These are sold at a discounted rate.

T-Bills are highly marketability 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 issued and par value of the securities and 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 issued at denomination $1000. The three months treasury bills refer to 91-days bills, or 13-weeks bills and six-month maturity bills may also refer to as 182- days bills or 26-weeks bills. Treasury bills are the deal in the money market.

In the new money market 

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

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

Bid                  Ask

5.85                 5.70

The bid is higher than Ask since these numbers show that the price of the treasury securities as a discount from face value. 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 and calculated at an annual rate, is 5.80%.

A basis point for a US Treasury securities are calculated for the one year, 182-days maturity or 91-days maturity are as follows:-

A basis point of 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 bills, 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- bills with 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

Show More
0 0 votes
Article Rating
Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments
Back to top button
0
Would love your thoughts, please comment.x
()
x

Adblock Detected

Please disable the ad blocker to enjoy the contents on our blog.