Treasury Bills

Treasury Bills

Treasury bills, also known as "T-bills," are a security issued by the U.S. government. When you buy one, you are essentially lending money to the government. Here, the term security means any medium used for investment, such as bills, stocks or bonds.

Treasury bills have a face value of a certain amount, which is what they are actually worth. But they are sold for less. For example, a bill may be worth $10,000, but you would buy it for $9,600. Every bill has a specified maturity date, which is when you receive money back. The government then pays you the full price of the bill -- in this case $10,000 -- and you earn $400 from your investment.

The amount that you earn is considered interest, or your payment for the loan of your money. The difference between the value of the bill and the amount you pay for it is called the discount rate, and is set as a percentage. In the example above, the discount rate is 4 percent, because $400 is 4 percent of $10,000.

Treasury bills are one of the safest forms of investment in the world because they are backed by the U.S. government. They are considered risk-free. They are also used by many other governments throughout the world.

Read on to find out about the different kinds of treasury bills, how to buy a treasury bill, and why they are so popular.

THE ORIGINS OF TREASURY BILLS

Treasury bills were first used in the United States during World War I, as a source of emergency funds to help balance the unprecedentedly high public debt. By the end of World War II, T-bills had become the most popular form of short-term government security.

How Treasury Bills Make Money

All treasury bills are short-term investments and mature within a year from their date of issue. You have the option of buying bills with maturity periods of one month, six months or one year. Generally, the longer the maturity period, the more money you will make from your investment. The face value of a treasury bill is called...