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Treasury Bills: Discount Pricing, Yield, Auctions, and Cash Planning

Understand current Treasury-bill terms, discount cash flows, auction pricing, yield conventions, early-sale limits, taxes, and cash-ladder tradeoffs.

Updated

For educational purposes only; not investment advice. Investing may result in loss.

Direct answer

A U.S. Treasury bill, or T-bill, is a marketable direct obligation of the U.S. government. Treasury currently issues regular bills with 4-, 6-, 8-, 13-, 17-, 26-, and 52-week terms, plus cash management bills at irregular times and variable terms. Bills pay no periodic coupon: they are sold at a discount or at par, and Treasury pays face value at maturity.

That 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 of interest before tax. If sold early, however, its market price can be above or below the purchase price and transaction costs can apply. A T-bill is not a bank deposit, and the U.S. government’s payment obligation does not guarantee an investor’s early-sale price, real purchasing power, or operational access to cash.

Cash flows, auctions, and yield conventions

Regular bills are auctioned weekly except 52-week bills, which are auctioned every four weeks; schedules can change, and cash management bills have no regular schedule and are not sold in TreasuryDirect. The minimum is $100 in $100 increments. In a noncompetitive bid, an investor requests a face amount, agrees to the auction’s high discount rate, and receives the requested amount up to the $10 million limit. TreasuryDirect accepts only noncompetitive bids; a bank, broker, or dealer may offer competitive or noncompetitive bidding. A bidder cannot use both methods in the same auction.

Treasury uses a single-price auction: successful competitive bidders and noncompetitive bidders receive the price corresponding to the highest accepted discount rate. A competitive bid can receive all, some, or none of the requested amount. A noncompetitive bidder knows the requested face amount but not the purchase price or discount rate until the auction result.

Bills can also be bought and sold in the secondary market. The investor should identify the CUSIP, exact maturity date, settlement debit or proceeds, quoted price or yield convention, bid-ask spread, markup, and fee. Maturity is repayment by Treasury through the custodian, not a market sale. Reinvestment purchases a new security at a later auction’s terms and does not preserve today’s yield. At a broker, practices for auto-roll, cash credits, settlement, and order execution are firm-specific.

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
  • For bills with no more than half a year to maturity, Treasury’s investment-rate calculation uses invested capital and 365 or 366 days, depending on the relevant year; longer bills use a different compounding formula.

Because the denominator, day count, and compounding can differ, the bank discount rate, investment rate, bond-equivalent yield, annual percentage yield, and holding-period return are not interchangeable. A broker’s displayed yield may also use a particular price and settlement date. Compare bills, deposits, and funds using the same convention, measurement 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%
  • Bank discount rate: $125 / $10,000 × 360 / 91 ≈ 4.95%

The 1.266% figure is the return over 91 days; 5.08% and 4.95% are different annualized quotations for the same cash flows. The simple 365-day calculation is suitable for this 91-day illustration but is not Treasury’s formula for every bill term. The contractual dollar interest is $125 if held to maturity, and none of these figures guarantees the next bill’s yield.

A cash ladder matches maturity payments to spending dates. For example, $40,000 needed in four installments could be divided among 4-, 8-, 13-, and 17-week maturities, provided the actual issue and maturity dates precede the bills. Each maturity can fund the planned expense or be reinvested. A ladder schedules liquidity and diversifies reinvestment dates; it does not eliminate reinvestment risk, guarantee continuous auction availability, or predict 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 does not execute an early sale. A newly issued marketable security generally must remain there for 45 calendar days before it can be transferred to a bank, broker, or dealer for sale; consequently, an original-issue 4-week bill bought there cannot be transferred before maturity. Fully funded reinvestments are an exception to that holding period. Broker 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: For a U.S. taxpayer, Treasury interest is subject to federal income tax and exempt from state and local income taxes. Early-sale gain can have special short-term government-obligation treatment, and account type, tax elections, residency, withholding, and other jurisdictions 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 auction order always debits $10,000.” That is normally the face amount; a discounted bill costs less, and the exact debit is known after the auction.
  • “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.

Authoritative sources

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