Treasury Bills in 5 Steps: Where the Return Comes From

1. A treasury bill pays no interest along the way

Five steps to how treasury bills pay, starting with a price below face value. Number one: a treasury bill pays no interest along the way, because you buy it below its face value. When it matures, one market's page says, you are paid the full face value. Two other markets describe it the same way: no coupon, issued at a discount.

One of them gives an example: a ninety-one-day bill with a face value of 100 may be issued at about ninety-eight twenty. That's a discount of about one eighty, and the bill pays back the full 100. By our count, one eighty on a price of ninety-eight twenty is about 1.83%. One page calls that gap the interest, and says bills pay interest only at maturity.

The same page notes a bill can also sell at par, which is the face value itself. Bills mature in one year or less, and the smallest purchase and who can buy differ by market. If you want more money explained with official numbers, subscribe now, so the next step-by-step video reaches you. Number two shows who sets that price below face value: the auction.

2. The rate isn't fixed in advance

Number two: the rate isn't fixed in advance, because an auction sets it, and you can bid in one of two ways. With a non-competitive bid, you name only the amount and accept the rate the auction sets. With a competitive bid, you name the rate you will accept. One market's page says you pick one of the two ways, never both in the same auction.

It accepts all the non-competitive bids first. Then it accepts competitive bids from the lowest rate to the highest, until the whole offering is awarded. Every successful bidder gets the same rate as the highest accepted bid. Another market calls that highest accepted yield the cut-off yield.

There, non-competitive bids are allotted first, up to 40% of the issue. And all bids need to be in by noon on auction day. A competitive bid may be filled in full, in part, or not at all. At one auction in August twenty twenty-four, bids right at the cut-off got about 0.4% of what they asked.

In a third market, the non-competitive price is the weighted average of what competitive bidders paid. That average can only be worked out after the auction, so the price is unknown while you bid. To cover that, a small markup is applied, in case the average comes out higher. At one of its auctions, on September twenty-third, that average for the ninety-one-day bill was 98.6793.

The cut-off price was 98.674, so the average came out a little higher. Number three turns that price into a gain you can work out yourself.

3. The rate an auction quotes and the gain on what you pay are two different numbers

Number three: the rate an auction quotes and the gain on what you pay are two different numbers. The gain on what you pay is the face value minus the price, divided by the price. One page's example: pay ninety-five for a one-year bill with a face value of 100. The gap is five, and five divided by ninety-five is about 5.26%.

Another page goes the other way, from a quoted discount rate to the price. Its worked example takes a twenty-six-week bill of 1,000 at a discount rate of 0.145%. The formula prices it at 999.27, a discount of 0.73. That rate is only the page's example, not a rate to expect today.

We're halfway: the discount, the auction and the math, with two steps to go. Rates are counted differently too: one market divides by 360 days, another uses actual days over 365. At one auction on October twenty-sixth, a thirteen-week bill sold at about 98.98 per hundred. A twenty-six-week bill sold at about 97.87, and a fifty-two-week bill the next day at about 95.66.

By our count, that's a gap of about one, two and four for every hundred of face value. On the same result sheet, that twenty-six-week bill shows a high rate of 4.210. It also shows an investment rate of 4.361, a different way to measure the same bill. At those auctions, the longer the term, the lower the price per hundred.

How interest makes money grow is in our earlier video, linked on screen. Prices move at every auction, so these are dated examples, never a promise. Number four takes the same idea to more than one market.

4. The same discount bill exists in more than one market

Number four: the same discount bill exists in more than one market, each with its own terms and minimums. One market sells bills of four, six, eight, thirteen, seventeen, twenty-six and fifty-two weeks. Another sells six-month and one-year bills. A third issues bills of ninety-one, 182 and 364 days.

The smallest purchase is 100 in the first, 1,000 in the second and 10,000 in the third. Who can buy differs as well. One page says all its auctions are open to the public. Another says institutions and individuals can buy, including non-residents, and individuals need to be eighteen or older.

In the third market, individuals can open an account with the central bank and bid in the non-competitive segment only. Non-competitive bids top out at 10 million per auction in one market, and 1 million in another. Auctions run weekly for most terms in one market, and usually every Wednesday in another. In one breath: a discount price, an auction that sets it, and a gain you can work out.

Taxes on that gain also differ by market, and nothing here is advice to buy. Before number five, a guess: on the day a bill matures, do you have to do anything?

5. On the maturity day

Number five: on the maturity day, the face value is paid automatically, and you don't have to do anything. Another market's page says the money is credited to your bank account, with no transaction fee. A third says the redemption amount goes to the investor's linked bank account. One market also lets you reinvest, using the money from a maturing bill to buy another of the same type.

A maturing fifty-two-week bill can be reinvested only in another fifty-two-week bill. Its page lists how many reinvestments you can schedule: twenty-five for a four-week bill, down to one for a fifty-two-week bill. By our count, twenty-five four-week bills cover 100 weeks, close to two years. That option closes four business days before the relevant auction.

You can also sell before maturity, but the price can change from day to day. One page says the price may be higher or lower than what you paid. In one market, a bill bought straight from the government must be held forty-five days before it can be sold. That page adds that a four-week bill bought there can't be sold early, because it matures in less than forty-five days.

To sell in that market, you work through a bank, broker or dealer. Reinvesting, selling and fees all differ by market, so each market's own page is the place to check. So, five steps: the discount, the auction, the math, the markets and the maturity day. Comparing the three markets, the shortest term is four weeks and the longest is one year.

The smallest purchase runs from 100 to 10,000, and every page says the face value is paid at maturity. One small step today: open one official bill page, linked below, and find its smallest purchase. Which surprised you more: no interest along the way, or an auction that sets the price? Leave it in the comments.

Rates, terms and taxes differ by market, and this is information only, not financial advice. This is Wealth Filings. If this helped, subscribe now, so the next step-by-step video reaches you first.