T-bills

Definition

T-bills, or Treasury bills, are short-term debt securities issued by the U.S. government. They are considered one of the safest investments due to the full faith and credit backing of the federal government, and they are commonly used in the context of securities markets as a low-risk investment option.

5 Must Know Facts For Your Next Test

1. T-bills have maturities ranging from 4 weeks to 52 weeks, with the most common being 3-month and 6-month T-bills.
2. T-bills are sold at a discount to their face value, and the difference between the purchase price and the face value at maturity is the investor's return.
3. The interest earned on T-bills is exempt from state and local taxes, making them an attractive investment option for investors in higher tax brackets.
4. T-bills are often used as a benchmark for short-term interest rates and are considered a safe haven investment during times of market volatility.
5. The U.S. Treasury Department auctions T-bills weekly, and the yield is determined by the market's demand for these securities.

Review Questions

• Explain the key features of T-bills and how they differ from other types of Treasuries.
  • T-bills are short-term debt securities issued by the U.S. government with maturities ranging from 4 weeks to 52 weeks, typically 3-month or 6-month. They are sold at a discount to their face value, and the difference between the purchase price and the face value at maturity is the investor's return. Unlike longer-term Treasuries, such as Treasury notes and bonds, T-bills do not pay periodic interest payments, and the interest earned is exempt from state and local taxes. T-bills are considered one of the safest investments due to the full faith and credit backing of the federal government, and they are often used as a benchmark for short-term interest rates and as a safe haven investment during times of market volatility.
• Describe the role of T-bills in the securities markets and their relationship to the yield curve.
  • T-bills play a crucial role in the securities markets as a low-risk investment option. They are often used as a benchmark for short-term interest rates, and their yields are influenced by the market's demand for these securities. The yields on T-bills are closely tied to the shape of the yield curve, which is a graph that plots the yields of Treasuries with different maturity dates. The yield curve provides insight into interest rate expectations, and the relative position of T-bill yields within the yield curve can signal the market's assessment of future economic conditions and the direction of interest rates.
• Analyze the factors that contribute to the high liquidity of T-bills and their appeal as a safe-haven investment.
  • T-bills are considered highly liquid due to their short-term nature, which allows investors to easily convert them into cash. This liquidity, combined with the full faith and credit backing of the U.S. government, makes T-bills an attractive safe-haven investment during times of market volatility. Investors often flock to T-bills when they seek to preserve capital and minimize risk, as the principal and interest payments are virtually guaranteed. Additionally, the tax-exempt status of the interest earned on T-bills makes them particularly appealing for investors in higher tax brackets. The regular auctions conducted by the U.S. Treasury Department also contribute to the high liquidity of T-bills, as they ensure a steady supply of these securities in the market.

Related terms

Treasuries: Treasuries are debt obligations issued by the U.S. government, including T-bills, Treasury notes, and Treasury bonds.

Yield Curve: The yield curve is a graph that plots the yields of Treasuries with different maturity dates, providing insight into interest rate expectations.

Liquidity:

Liquidity refers to the ease with which an asset can be converted into cash, and T-bills are considered highly liquid due to their short-term nature.