What it means
T-Bills are issued with maturities of 4, 8, 13, 17, 26 and 52 weeks. They do not pay a coupon (a periodic interest payment) the way longer bonds do; instead they are sold at a discount to face value and redeemed at full face value, so all of your return arrives in one lump at the end.
For a business, T-Bills matter because they are where surplus operating cash often goes when it is not needed for a few weeks or months. A company sitting on $30 million of proceeds from a funding round wants that money to earn something without any real chance of losing principal, and a ladder of short bills does exactly that.
The yield quoted on a T-Bill can be expressed in two ways, which trips people up constantly. The bank discount yield uses face value as the base and a 360-day year, while the investment yield (also called bond equivalent yield) uses the purchase price and a 365-day year, and the investment yield is always the higher of the two.
T-Bill yields also act as the market's reference point for "risk-free" returns, which feeds into valuation models, hurdle rates and the pricing of almost everything else. When people say the risk-free rate is 5%, they usually mean a short Treasury bill yield.
The three-month bill is the most widely watched of the set. One nuance worth knowing: T-Bills carry no credit risk in practical terms but they do carry reinvestment risk and interest rate risk if you sell before maturity.
If rates rise after you buy, the market price of your bill falls, and selling early crystallises that loss. Hold to maturity and you simply get the face value you were promised.
In practice
Real-world examples.
Example
A software company raises $40 million and expects to spend it over three years. The finance director puts $12 million into a ladder of 13-week and 26-week T-Bills so cash matures roughly every month and can be redeployed into payroll and hosting costs without selling anything early.
Example
A regional construction firm receives a $6 million progress payment in January but does not owe its subcontractors until April. It buys 13-week T-Bills, earns roughly $70,000 of yield over the quarter, and has the cash back exactly when the invoices land.
Example
An investment committee at a university endowment uses the three-month T-Bill yield as the risk-free rate in its cost of equity calculation. When that yield moves from 2% to 5%, every discounted cash flow model in the portfolio produces lower valuations.
Think of it
“T-bill is the abbreviation for Treasury Bill-short-term government debt.
Formula
Calculation
Investment yield = (Face value - Purchase price) / Purchase price x (365 / Days to maturity)
A treasury team buys a 26-week (182-day) T-Bill with a face value of $100,000 and pays $97,500 for it.
Discount earned = $100,000 - $97,500 = $2,500
Holding period return = $2,500 / $97,500 = 2.5641%
Annualisation factor = 365 / 182 = 2.0055
Investment yield = 2.5641% x 2.0055 = 5.14%
For comparison, the bank discount yield on the same bill is ($2,500 / $100,000) x (360 / 182) = 4.95%. Same bill, same cash flows, two different quoted numbers, which is why you always check which convention a quote uses.Case study
Seen in the real world.
Meridian Optics is a fictional contact lens manufacturer used here purely as an illustrative example. After selling a distribution subsidiary for $52 million, its board wanted the proceeds preserved rather than invested aggressively, because an acquisition was expected within nine months.
The treasurer built a rolling ladder: $18 million in 13-week bills, $18 million in 26-week bills and $16 million in 52-week bills. Over the following year the blended yield came in around 5%, adding roughly $2.6 million of income with no credit exposure and no need to sell anything before maturity.
When the acquisition target was found seven months in, two tranches had already matured and the third was sold in the secondary market at a small gain. The illustrative lesson is that matching maturity dates to expected cash needs is what makes a T-Bill ladder useful, not the yield itself.
Watch out
Common mistakes.
- Assuming T-Bills pay interest along the way. They pay nothing until maturity; the entire return is the gap between what you paid and the face value you receive.
- Comparing a discount yield on a T-Bill against the stated rate on a bank deposit. The two use different day counts and different bases, so the comparison flatters the deposit unless you convert to the same convention.
- Treating T-Bills as completely risk free in all circumstances. Credit risk is negligible, but if you need the cash early and rates have risen, you can absolutely sell at a loss.
Questions
People also ask.
How is a T-Bill different from a Treasury note or bond?
Bills mature in a year or less and pay no coupon, while notes (2 to 10 years) and bonds (20 to 30 years) pay interest twice a year.
Are T-Bill returns taxed?
The interest is subject to federal income tax but is generally exempt from state and local income tax, which raises the effective after-tax yield for investors in high-tax states.
Can a small business buy T-Bills directly?
Yes, through the government's direct purchase platform or via a broker, though many smaller firms use a government money market fund instead for the daily liquidity.
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