Question of the Week – What are Treasury Bills?

Our look at basic investments continues this week with a look a Treasury Bills (T-Bills).

A T-Bill is a short-term loan an investor makes to the government. They truly are short-term as the longest term to maturity you can get with a T-Bill is one year. They also can be bought for smaller terms including 26 weeks or less. T-Bills are not purchased directly from the government, but are instead sold through a dealer.

T-Bill’s pay their returns through interest, but investors don’t receive interest payments. Instead investors purchase T-Bills at a discounted rate and receive its face value upon maturity. For example, a $1,000 T-Bill could be bought by an investor for $950. When the T-Bill reaches maturity, the investor can receive $1,000. These numbers are just an example, and do not reflect the real value or potential returns of a T-Bill.

T-Bills are low risk investments, as there is no chance the government will default on them. The only real risk with a T-Bill is interest rate risk. As the rate is fixed, if rates change you could be making less than the current interest rate from your investment. However, due to the short-term nature of T-Bills even the interest rate risk is low.