Treasury bills are the shortest-term marketable debt securities issued and sold by the U.S. Department of the Treasury. T-bills offer one of the safest ways to put cash to work earning interest. However, in a low-interest-rate economy, the interest you can earn from a Treasury bill may be measured in just a handful of dollars, or even in pennies.
Short Term Investment for Small and Large Amounts
The U.S. Treasury sells T-bills with initial terms of four, 13, 26 and 52 weeks. Bills of the three shorter maturities are auctioned by the Treasury every week, and new one-year Treasury bills come out monthly. Treasury bills can be purchased in face amount increments of $100, with a $100 minimum purchase size. With tens of billions of dollars of new T-bills sold every week, there is almost no upper limit on the amount of money an investor could put into one or more federal government direct obligation Treasury bills.
Treasury Bill Discount Pricing
Instead of earning cash interest, Treasury bills are sold at a discount to the face amount, and the earnings will be the difference between the purchase price and the face amount received when the bill matures. For example, a 52-week, $100,000 T-bill with a rate of 1.5 percent would cost $98,500. The current rate of Treasury bills slightly understates the earned yield, as the invested amount is less than the face amount. In the example, an investor would earn $1,500 on a $98,500 investment, which is a yield of 1.523 percent. Rates are annualized so the price discount on shorter-term T-bills will be smaller. A 26-week bill earning 1.5 percent would cost $99,250 to earn $750 in half a year.
Short Term Rates Controlled by Federal Reserve
Treasury bills function at the short end of the yield curve, where interest rates are controlled by the policies of the Federal Reserve Board, also known as the Fed. The rates investors earn on T-bills will be very close to the discount rate set by the Fed, with some adjustments for the different maturity terms. Starting in late 2008 and still in effect at the time of publication, the Fed was working with a zero interest rate policy to stimulate economic growth. As a result, the yields on Treasury bills while this policy was in effect were very low. In early 2014, the yields on T-bills ranged from 0.01 percent for four-week bills up to 0.12 percent on a 52-week bill. This means on $100,000 of the longest-term T-bill, the interest earned for the year would be just $120.
Buy Direct or Through Your Broker
Treasury bills can be purchased directly from the government agency by setting up an account on the TreasuryDirect website. With an account, T-bill purchase orders are filled on the specified auction date at the average of the winning competitive yield bids. You can also buy T-bills through any investment broker. A broker will either charge a commission to purchase a bill or mark up the price slightly to build in a profit compared to the broker's cost in the secondary market.
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