Treasury Bill

Treasury bill or T-Bill are short-term debt instruments upto one year, issued by the government with guarantee repayment. They are present in three tenors: 91 days, 182 days and 364 days. They are zero coupon securities and has no interest.

A treasury bill is an integral monetary tool imposed by the RBI to regulate the total money supply in an economy, along with its fundraising usage.

When an investor buys a Treasury Bill, they are lending money to the government. The governments use the money to fund its debt and pay ongoing expenses such as salaries and military equipment.

In the US, treasury bills are not only savings instruments; they can be used to settle transactions. Treasury bills, which are issued electronically, can be sent through the payments system as readily as money.

Treasury bills are sold at a discount to the par value, which is its actual value. For example, a Treasury bill with a par value of Rs.10,000 may be sold for Rs.9,500. The government, through the RBI, promises to pay the investor the full face value of the T-bill at its specified maturity date. Upon maturity, the government will pay the investor Rs.10,000, resulting in a profit of Rs.500. The amount of profit earned from the payment is considered the interest earned on the T-bill.

The difference between the face value of the T-bill and the amount that an investor pays is called the discount rate, which is calculated as a percentage. In this case, the discount rate is 5% of the face value.

Features of treasury bill are:

• Minimum investment

• Zero-coupon securities

• Opaque trading

• Yield rate on treasury bills where Y = (100-P) X 356/D X 100

Where Y = Return percent, P = Discounted price, D = Tenure of a bill

• Risk-free

• Liquidity

• Non-competitive bidding

One major advantage of treasury bill is that the retail investors are not required to pay any TDS on redemption of these bonds.