Treasury bills

Definition

Treasury bills, often referred to as T-bills, are short-term government securities issued by the U.S. Department of the Treasury to help finance national debt. They are sold at a discount to their face value and do not pay interest in the traditional sense; instead, the investor receives the face value upon maturity, with the difference being the interest earned. T-bills are considered highly liquid and safe, making them a common choice for cash equivalents.

5 Must Know Facts For Your Next Test

1. Treasury bills are issued with maturities ranging from a few days up to one year, making them a very short-term investment option.
2. T-bills are backed by the full faith and credit of the U.S. government, which is why they are considered one of the safest investments available.
3. They are auctioned regularly, and individuals can purchase them directly from the government or through brokers.
4. Investors do not receive periodic interest payments from T-bills; instead, they earn interest through the difference between the purchase price and the face value paid at maturity.
5. Because of their safety and liquidity, Treasury bills are often used by corporations and financial institutions as a way to manage cash flow and preserve capital.

Review Questions

• How do Treasury bills function as cash equivalents in financial management?
  • Treasury bills function as cash equivalents because they can be quickly converted into cash without significant loss of value. They are highly liquid assets due to their short maturities and backing by the U.S. government. This makes them an ideal choice for businesses looking to manage excess cash while ensuring safety and easy access to funds when needed.
• Discuss the advantages and disadvantages of investing in Treasury bills compared to other short-term investments.
  • Investing in Treasury bills offers several advantages, including their safety due to government backing and liquidity since they can be easily bought or sold. However, they typically yield lower returns than other short-term investments like corporate bonds or stocks. Investors might choose T-bills for capital preservation and security over higher potential returns offered by riskier assets.
• Evaluate how changes in interest rates can impact the demand for Treasury bills among investors.
  • Changes in interest rates significantly influence the demand for Treasury bills. When interest rates rise, new T-bills offer higher yields compared to existing ones, which may cause investors to sell their current T-bills, lowering their prices. Conversely, when rates fall, T-bills become more attractive as they retain their value better than other fixed-income securities. This dynamic can shift investor preferences based on market conditions, ultimately affecting overall demand for these instruments.

Related terms

Cash Equivalents: Assets that are readily convertible to cash with an insignificant risk of change in value, typically including Treasury bills, money market funds, and commercial paper.

Marketable Securities: Financial instruments that can be quickly converted into cash at a reasonable price, which includes Treasury bills and other short-term investments.

Discount Rate: The difference between the purchase price of a Treasury bill and its face value, representing the interest earned by the investor.