# Treasury Bills: Discount Pricing, Yield, Auctions, and Cash Planning
Understand how U.S. Treasury bills turn a discounted purchase price into maturity value, how yield conventions differ, and what to check before buying or selling.
Canonical: https://wiki.fcontext.com/stocks/treasury-bill/
Fact checked: 2026-07-22
> For educational purposes only; not investment advice.
## Direct answer
A **U.S. Treasury bill**, or T-bill, is a marketable U.S. government debt security with a maturity of one year or less. It normally pays no periodic coupon. Instead, an investor generally pays less than face value and receives face value at maturity; the difference is the interest income.
That simple cash flow should come before the quoted yield. A bill with $1,000 face value bought for $987.50 returns $1,000 at maturity, producing $12.50 before taxes and transaction costs. If sold before maturity, however, its market price can be above or below the purchase price. A T-bill is not a bank deposit, and “short term” does not mean that every exit is available immediately at face value.
## Cash flows, auctions, and yield conventions
Treasury issues bills at regularly scheduled auctions and may also issue cash management bills. Individuals can submit a noncompetitive bid through TreasuryDirect or, where offered, through a bank, broker, or dealer. A noncompetitive bidder agrees to accept the auction result rather than naming a yield. The exact purchase price is therefore known only after the auction.
Bills can also be bought and sold in the secondary market. There, the investor should identify the exact maturity date, settlement amount, quoted price or yield convention, bid-ask spread, markup, and any fee. Maturity converts the face value into cash under the custodian's process; it is not a secondary-market sale. An automatic reinvestment instruction buys a later issue at that later auction's terms and does not preserve today's yield.
Several return figures can describe the same bill:
- `holding-period return = (face value - purchase price) / purchase price`
- `bank discount rate = (face value - purchase price) / face value × 360 / days to maturity`
- A simple investment-rate annualization instead uses invested capital and commonly a 365-day year.
Because the denominator and day count differ, these figures need not match. Compare bills, deposits, and funds using the same convention, date, costs, tax treatment, and liquidity assumption.
## Worked purchase and cash ladder
Suppose a 91-day bill has $10,000 face value and costs $9,875.
- Cash paid: $9,875
- Periodic coupons: $0
- Cash received at maturity: $10,000
- Dollar interest: `$10,000 - $9,875 = $125`
- Holding-period return: `$125 / $9,875 ≈ 1.266%`
- Simple 365-day annualization: `1.266% × 365 / 91 ≈ 5.08%`
The 5.08% figure is an annualized comparison, not the return earned in 91 days. The contractual dollar difference is $125 if the bill is held to maturity. It also does not imply that another bill can be purchased at the same yield afterward.
A cash ladder matches maturities to spending dates. For example, $40,000 needed in four installments could be divided among roughly 4-, 8-, 13-, and 17-week maturities. Each maturity can fund the planned expense or be reinvested. The purpose is liquidity scheduling and diversification of reinvestment dates, not a prediction of interest rates.
Direct ownership differs from a money market fund or short-duration Treasury ETF. A specific bill has a stated maturity and face value. A fund continuously replaces holdings, charges expenses, and has its own redemption, distribution, and price behavior. An ETF share does not mature at the investor's chosen face value.
## Risks and purchase checklist
- **Early-sale risk:** market yields, remaining maturity, spreads, and dealer pricing determine the proceeds. Rising yields generally reduce the price of an existing bill.
- **Reinvestment risk:** maturity proceeds may have to be reinvested at a lower rate. Auto-roll changes the security, not this risk.
- **Liquidity timing:** TreasuryDirect securities must follow its transfer process before a market sale; brokerage settlement and cash-availability rules also matter.
- **Inflation risk:** repayment is in nominal dollars, whose purchasing power may fall.
- **Operational risk:** a wrong maturity, unintended reinvestment, insufficient cash reserve, or misunderstood quote can defeat the cash plan.
- **Tax risk:** Treasury interest is generally subject to U.S. federal income tax and generally exempt from state and local income taxes, but account, residency, and jurisdiction can change the result.
Before buying, record the earliest spending date, exact maturity, face value, estimated settlement debit, auction or secondary-market route, quote convention, costs, maturity destination, reinvestment setting, and early-liquidity plan. Compare after-tax, after-cost outcomes rather than the largest displayed yield.
## Common misconceptions
- “A 5% yield means earning 5% in three months.” It is normally an annualized quotation.
- “No coupon means no interest.” The discount-to-face-value difference is the usual interest mechanism.
- “A $10,000 order always debits $10,000.” A discounted bill generally costs less than face value.
- “A T-bill cannot lose money.” Holding to maturity and selling early are different outcomes.
- “Auto-roll locks in a rate.” The next auction determines the new price and yield.
- “A Treasury-bill ETF is a bill.” A perpetual fund share has no personal maturity payment at face value.
- “The highest displayed yield is the best cash choice.” Access time, costs, taxes, and the correct return convention can reverse that conclusion.
## Related topics
- [Money Market Funds](/stocks/money-market-fund/)
- [Bond ETFs](/stocks/bond-etf/)
- [How Interest Rates Affect Investments](/stocks/interest-rate-impact/)
## Authoritative sources
- [Treasury Bills](https://www.treasurydirect.gov/marketable-securities/treasury-bills/) - U.S. Department of the Treasury
- [How Treasury Auctions Work](https://www.treasurydirect.gov/auctions/how-auctions-work/) - U.S. Department of the Treasury
- [Selling Treasury Marketable Securities](https://www.treasurydirect.gov/marketable-securities/selling-marketable-securities/) - U.S. Department of the Treasury
- [Bonds](https://www.finra.org/investors/investing/investment-products/bonds) - Financial Industry Regulatory Authority