What you need to about Treasury Bills

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Treasury bills are a non-interest short-term money market instrument that is used by the Central bank of any country on behalf of its government to provide short-term funding for the latter. It doesn’t yield interest but issued at a discount, for instance, you buy a 91-day $10,000 treasury bill at a discounted rate of $9,700. The Government writes an IOU for $10,000 and agrees to pay back in 91 days, therefore, you make your money back when the bills are purchased back from you at full price. 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.

An important feature to note about treasury bills is that the date of the issue is predetermined, so also, the amount. Besides this, other features include the market-driven discount rate, selling through auction, investors can choose to purchase the 91 days treasury bills or the 182, or the 364 days treasury bills, assured yield, low transaction cost, etc.

It is a conventional method that most governments use to borrow money from the public. This short term method of borrowing by governments is widely practiced around the world. On the other hand, many investors find it attractive as it quite considered a risk-free investment, which is one of its advantages.

Another big advantage of treasury bills is that it’s one of the most liquid money market securities and is backed by the government. By being liquid, it means it can be easily converted to cash because it’s a short term instrument.

Unlike some investments that are for high net worth investors only, different classes of individuals, firms, banks, trust can purchase treasury bills as the minimum amount required is quite low but different depending on the kind of institution you are buying from.

Furthermore, treasury bills enable upfront earnings because it is a discount instrument, it thereby increases the effective yield on investment.

They can as well be used as collateral.

I guess you would rather consider investing in treasury bills if you are a risk-averse person than investing in equities (though you may earn more but for some associated risk level). Let me know what your thoughts are on treasury bills, leave a comment below.

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