If you need an ultra-safe place to park money, Treasury bills are what the professionals choose, even though their rates can be quite low. T-bills are short-term securities that mature in a year or less. They are sold in denominations of $1,000. The discount rate on T-bills changes daily, reacting quickly to developments in the economy and international politics. During the decade from 2002 to 2012, the high rate on 26-week bills was 5.12 percent on July 18, 2006. The low of 0.02 percent occurred on Aug. 26, 2011.
Step 1
Find the purchase price of a T-bill by calculating the discount over the term of the T-bill. T-bills are quoted according to their discount rates, so you pay less than their $1,000 face value. When they mature, you receive $1,000. The difference between what you paid and $1,000 is your interest earned.
Step 2
Multiply the rate of discount by the number of days to maturity. If the 26-week T-bill price is quoted at 0.145 percent, multiply .00145 by 182 days. Your answer is 0.2639.
Step 3
Divide 0.2639 by 360 to get the daily interest factor. In this example, the result is 0.000733. Subtract that number from 1 to get .999267. Multiply the result by 1000 to get the price of the T-bill, which in this case is $999.27.
Step 4
Subtract $999.27 from the face value of $1,000 to get your interest amount of $0.73. When the T-bill matures you will receive the full face amount of $1,000. Obviously, you would have to buy a lot of T-bills to realize a decent gain.
References
Tips
- If you buy your Treasury bills from TreasuryDirect.gov, you will not have to pay a transaction fee. When interest rates are low, a transaction fee can wipe out the interest on your T-bill investment.
Writer Bio
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.