 Personal Finance PowerPoint Presentation, Treasury Bills, T-Bills, prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia, Treasury Bills, T-Bills, which you can find online. Take a look at the references, resources, continue your research from there. This by Adam Hayes, updated June 2, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, and tools keeping those items in mind. We're now considering what is a Treasury Bill, T-Bills? A Treasury Bill, T-Bills is a short-term U.S. government debt obligation backed by the Treasury part in a department, in essence, the government, with a maturity of one year or less. We got a short-term type of investment, one year or less, backed by the government, therefore very secure. Treasury Bills are usually sold in denominations of $1,000, however, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments, so we've talked about different kinds of investments. We've talked about securities in general, investing in stocks, which are typically going to be a little bit more risky, but have a higher possible rate of return. One of the most least risky type of investments you can have would be then the Treasury Bill, due to the fact that they have that short-term kind of investment so that your money will be freed up in a short period of time. They're backed by the government, so you would think that unless the government was to default or have a problem of that nature, which would be a big problem in any case, then they would be able to secure their debts, and of course they have the printing press, so you would think that they would be able to pay them back in one way or the other. The Treasury Department sells T-Bills during auctions using a competitive and non-competitive bidding process. Non-competitive bids, also known as non-competitive tenders, have a price based on the average of all the competitive bids received. T-Bills tend to have a high-tangible net worth. Understanding Treasury Bills, T-Bills, the U.S. government issues T-Bills to fund various public projects, such as the construction of schools and highways. So clearly the government is the one you're basically loaning money in essence to the government in exchange for the Treasury Bill. If you're buying the Treasury Bill directly from the government, then the government is receiving money that they can use for various projects such as schools and highways. So when an investor purchases a T-Bill, the U.S. government is effectively writing an IOU to the investor. So basically it's kind of like a loan situation, so you've got a T-Bill, meaning you're giving the government money, they're giving basically a promissory note in essence to the Treasury Bill to be promised a repayment, the amount of the repayment possibly being higher than the amount that you loaned them, the difference in essence being interest. So T-Bills are considered a safe and conservative investment since the U.S. government backs them. So unless the government went under, stopped paying their debts, which would be a catastrophe, then it's safe and they got a printing press. So you would think they would be able to pay it back in some way. So T-Bills are normally held until the maturity date because they're short-term kind of investments you would think that normally you would hold them until the maturity date. However, some holders may wish to cash out before maturity and realize the short-term interest gains by reselling the investment in the secondary market. So you could, just like with other kind of bonds for example, sell the bill on the secondary market. The primary market would be that we're buying it from the issuer, in this case the U.S. government. The secondary market would be that we're buying or selling not from the issuer, but on the secondary market to some other investor. So T-Bills can have maturities of just a few days or up to a maximum of 52 weeks. So we said they're short-term, they're usually under a year, 52 weeks are in a year. But common maturities are 4, 8, 13, 26, and 52 weeks. The longer the maturity date, the higher the interest rate the T-bill will pay to the investor. So if you're, and this is kind of just the norm for investing generally, if you're going to lock your money, if you're going to be promising a longer term, then you would expect a higher rate of return than if you have a shorter term type of investment because it'll turn over at a shorter time and you're going to be wanting to line up what happens in the market, for example, to your basically your investment strategies. So T-bill redemptions and interest earned, T-bills are issued at a discount from the par value also known as the face value. So when you buy the T-bill, that means that you're going to be buying it the face amount of the bill, you're going to be purchasing it for something less than that. And then when you get the amount at maturity, then you're going to have the face amount which will be more than you paid the difference in essence being the interest that you earned. So of the bill, meaning the purchase price is less than the face value of the bill. For example, a 1000 bill might cost the investor 950 to buy the product. So you pay 950 for it and then at maturity, like 52 weeks later or 26 weeks or whatever, then you're going to be receiving the full thousand dollars. They're going to give you a thousand dollars instead of the 950 you gave them due to the fact that you basically have interest on it. So when the bill matures, the investor is paid the face value, par value of the bill they bought. If the face value amount is greater than the purchase price, the difference is the interest earned for the investor. T-bills do not pay regular interest payments as with coupon bonds. But so meaning a normal bond, you might think, is going to be paying you interest periodically, possibly semi-annually as a common type of payment structure. But obviously the T-bills are so short in nature they're only a year long that it doesn't really make sense to be paying the interest possibly on a periodic framework, but instead at maturity you're paying the interest. So it's similar to any other kind of bond where you really have the factors of the face amount and then kind of the interest rate that you have and then how much you're going to pay for it. But instead of having the interest rate basically pay out periodically, you're going to get the interest by just the maturity point of the bond having an amount higher than you paid for it basically. So but a T-bill does include interest reflected in the amount it pays when it matures. So T-bill tax consequences. The interest income from T-bills is exempt from state and local income taxes. So that can have a significant impact but note that it will be dependent upon where you live, what states you are in and your income level and what kind of tax system the state has is that more of a progressive tax or a flatter kind of tax system. So taxes always complicate things. However, the interest income is subject to federal income tax. So it is subject to federal income tax. Investors can access the research division of the Treasury website for more tax information. Purchasing T-bills, previously issued T-bills can be bought on the secondary market through a broker. New issues of T-bills can be purchased at auctions held by the government on the Treasury direct site. T-bills purchased at auction are priced through a bidding process. Bids are referred to as competitive or non-competitive bids. Further bidders can be indirect bidders who buy through a pipeline such as bank or a dealer. Bidders may also be direct bidders purchasing on their own behalf. Bidders range from the individual investors to hedge funds, banks and primary dealers. The competitive bid sets a price at a discount from the T-bills par value. So when you're looking at the bidding, you've got a market kind of structure happening. How does that work? Well, they're going to try to set the price that they're going to pay below the face amount, the difference being what the interest that they're going to earn at the end of the maturity date. So letting you specify the yield you wish to get from the T-bill, the yield being in essence the return that you would be getting, the difference between what you paid and the maturity price or the face amount. Non-competitive bids auctions allow investors to submit a bid to purchase a set dollar amount of bills. So a non-competitive, I believe they said is going to be based, a price kind of based on the competitive bids, possibly taking like an average of them in that way so that you can have that kind of purchasing process. The yield investors receive is based upon the average auction price from the bidders. So they can take that average price because that's kind of like the market consensus and use that. Competitive bids are made through a local bank or a licensed broker. T-bills investors can make non-competitive bids via the Treasury Direct website. Once completed, the purchase of the T-bills serves as a statement from the government that says you are owed the money you invested according to the terms of the bid. So it's kind of like a promissory note that you're receiving saying we're going to pay you so much at the maturity of this thing for whatever you paid them and amount less than the face amount. So T-bills investment pros and cons, Treasury bills are one of the safest investments available to the investor. So you're buying from the government. You would think the government's not going to default if they did it would be a major crisis. They got a printing press. You would think that they can pay back their obligations one way or the other. So but the safety can come at a cost. T-bills pay a fixed rate of interest, which can provide a stable income. So however, if interest rates are rising, existing T-bills fall out of favor since their rates are less attractive compared to the overall market. So clearly if you have that level of security, which is extremely high, then you would expect that people are willing to pay, they can sell them then those securities at a low return because of that high level of risk-free-ness. So that's going to be of course the trade-off. It's a very safe investment. You're not going to get a whole lot of return on it. However, it's typically thought of as kind of a boring kind of investment and whatnot. But if the market declines, then it may be able to be used like as a hedge is a good place to be to at least not be losing money. So as a result, T-bills have an interest rate risk meaning there is a risk that existing bondholders might lose out on higher rates in the future. So same kind of risk with bonds in general. If you hold on to the bond, now note you're only holding on here for a fairly short period of time, but holding on to the bond if the market rates go up, then now you've got a fixed rate and if you had the money elsewhere, you might be able to invest it at higher rates of returns for similarly designed investments. So the market fluctuation will of course be a factor. So although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposits. So again, you could be purchasing your bonds, loaning money in essence not to the government but to corporations. Corporations can't print money. Even a large corporation, something could happen and they go under or something like that so they're not as safe as you would think the U.S. Treasury bonds would be. The T-bills. So since Treasury bills don't pay periodic interest payments, they're sold at a discount price to the face value of the bond. The gain is realized when the bond matures, which is the difference between the purchase price and the face value. However, if they're sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. So if you sold them early, then you could have a gain or a loss at that point possibly subject to capital gains or some kind of taxation at that point. So in other words, if sold early, the sales price of the T-bills could be lower than the original purchase price. Pros. Zero default risk since T-bills have U.S. government guarantee. T-bills offer a low minimum investment requirement of $100. Interest income is exempt from state and local income taxes, but subject to federal income taxes. Investors can buy and sell T-bills with ease in the secondary bond market. What are the cons? T-bills offer low returns compared with other debt instruments as well as when compared to certificates of deposits. You don't have much of a return happening there, but at least they're not going to go down. You're not going to lose. So the T-bill pays no coupon interest payments leading up to the maturity because basically the interest rate is fixed into the fact that you're paying for something less than the maturity price. And when you receive it at maturity, that's basically your gain or interest in essence. So T-bills can inhabit cash flow from investors who require steady income. T-bills can inhibit cash flow. So T-bills have interest rate risk. So their rate could become less attractive in a rising rate environment. What influences T-bill prices then? T-bill prices fluctuate similarly to other debt security. So it's kind of like a bond kind of situation here. Many factors can influence T-bill prices, including microeconomic conditions, monetary policy, and the overall supply demand for treasuries. Maturity dates. T-bills with longer maturity dates tend to have higher returns than those with short-term maturities. That's just kind of the general rule. If you're going to be locking in to a longer maturity, you're doing so in exchange generally for higher interest rates, hopefully, because you're taking on some risk with interest rate risk on the market. So in other words, short-term T-bills are discounted less than longer dated T-bills. So longer dated maturities pay higher returns than shorter dated T-bills because there's more risk into the instrument, meaning there's a greater chance that interest rates could rise. Long-term market interest rates make the fixed rate T-bills less attractive. So market risk, investors risk tolerance affects prices. T-bills prices tend to drop when other investments such as equities appear less risky and the U.S. economy is in an expansion. So if everything's going good and people are saying, hey, the economy's on fire, then everybody runs to the equities because they're trying to get a higher return. So that means they might be running out of T-bills at that point in time. On the other hand, conversely, during recession, investors tend to invest in T-bills as a safe place for their money spiking the demand for these safe products. So in other words, if you anticipate and recession coming, you may not want your money in equities because then you might lose money because it has the potential to actually go down and people start parking their money in treasury bills, which aren't very exciting in that they might not be getting a return, but they're not likely to go down. They're going to be a safe place in the event of a downturn in the market would be the concept. The Federal Reserve, so when you're looking, you're trying to gauge the market, then you might be looking at T-bills and saying, okay, everybody's running the T-bills. That's not a good sign, right? So the Federal Reserve, the monetary policy set by the Federal Reserve through the federal funds rate has a strong impact on T-bill prices as well. The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balance on an overnight basis. The Fed will increase or decrease the Fed funds rate in an effort to contract or expand the monetary policy and the availability of money in the economy. A lower rate allows banks to have more money to lend while a higher Fed's fund rate decreases money in the system for banks to lend. As a result, the Fed's actions impact short-term rates, including those for T-bills. A rising federal funds rate tends to draw money away from treasuries and into higher yield investments. Since the T-bills rate is fixed, investors tend to sell T-bills when the Fed is hiking rates because the T-bill rates are less attractive. Conversely, if the Fed is cutting interest rates, money inflows into existing T-bills driving up prices as investors buy up the high-yielding T-bills, the Federal Reserve is also one of the largest purchases of government debt securities. When the Federal Reserve purchases U.S. government bonds, bond prices rise while the money supply increases through the economy as sellers receive funds to spend or invest. So when you're thinking about strategies on the government side of things to stimulate the economy, they can have an impact on the interest rates. And they can also purchase and sell their own Treasury bills. So they might be purchasing back, for example, their own T-bills on the market. So they have already issued the T-bills. They buy the T-bills back. What that does is put more money back into the economy because they're giving money, basically, to the investors at that point in time, which is supposed to stimulate the economy and so on. Funds deposited into banks are used by financial institutions to lend to companies and individuals boosting economic activity. So inflation. Treasuries also have to compete with inflation. So inflation, meaning the value of the dollar going down, therefore, you can purchase less good, which measures the pace of rising prices in the economy, meaning stuff's getting more expensive, the dollars not containing as much value. So even if T-bills are the most liquid and safest debt security in the market, fewer investors tend to buy them in times when the inflation rate is higher than the T-bill return. So notice we said if you put money into the Treasury bills, you would expect that you're not going to get lost because they're backed by the Federal Reserve and you have that fixed interest rate. But what if that rate that you're receiving is actually less than inflation? That means the actual purchasing power of your investment is still going down. You're still kind of losing money in that situation, which of course is kind of a problem if you could find some other place to put the money. So for example, if an investor bought a Treasury bill with 2% yield, well, inflation was at 3%. So this is another, now you've got a situation where the inflation is higher than what you're getting a return on. You may still want your money in the bonds because if things are bad, you might be saying, okay, I'm losing a percent return, but if I had my money in the stock market, which is tanking at this point in time, I could lose a whole lot more. So losing 1% could be a better option if you think everything is going down or so on. But obviously you would like to be getting a return greater than inflation. You would like your purchasing power to be increasing, not decreasing if possible. So the investor would have a net loss on the investment when measured in real terms. As a result, T-bill prices tend to fall during inflationary periods as investors sell them and opt for higher yielding investments. Example of a Treasury bill purchase. As an example, let's say an investor purchased a par value of $1,000 T-bill with a competitive bid of $950. We pay 950, we're gonna get $1,000 at maturity. When the T-bill matures, the investor is paid the $1,000, thereby earning $50 in interest on the investment. So notice we don't really have the rate of return like specified on the bill, but that's interest because we got a return on it of the $50, which you can figure what the, so the investor is guaranteed to at least recoup the purchase price, but since the US Treasury backs T-bills, the interest amount should be earned as well. So as stated earlier, the Treasury Department auctions new T-bills through the year on March 28th, 2019, the Treasury issued a 52-week T-bill at a discounted price of $97.61 about to a $1,000 face value. In other words, it would cost approximately $970 for a $1,000 T-bill. So what are the maturity terms for Treasury bills? US Treasury bills are short-term government bonds and are issued with five terms. These consist of four, eight, 13, 26, and 52 weeks. What kind of interest payment will I receive if I own a Treasury bill? The only interest paid will be when the bill matures. So you're not gonna get the semi-monthly, you're gonna get it at the maturity date in the form of the face amount being higher than what you paid for it. At that time, you are given the full face value, T-bills are zero coupon bonds that are usually sold at a discount and the difference between the purchase price and the par amount is your accrued interest. How can I buy a Treasury bill? US Treasury bills are auctioned on a regular schedule. Individuals can buy T-bills from the government using the Treasury Direct website. It is free to register and it will function like a brokerage account that holds your bonds. In addition to bidding on the new issues, you also can set up reinvestments into securities of the same type and term. For instance, you can use the proceeds from a maturing 52-week bill to buy another 52-week bill. Certain brokerage firms may also allow trading in US Treasuries. Where is my paper hard copy of the T-bill I bought? So now you're gonna think, well, how do I have the evidence of the T-bills? T-bills and other government bonds are no longer issued on paper and are only available in digital form through Treasury Direct or your broker. So you don't have the paper forms are going the way of the dodo, which died a long time ago. So in any case, how are T-bills different from Treasury notes and bonds? T-bills are short-term investment debt instruments with maturities of one year or less and they are sold at a discount without paying a coupon. T-notes represent the medium term maturities of two, three, five, seven and 10 years. These are issued at par $100 and pay semi-annual interest. T-bills and otherwise identical to T-bills are otherwise identical to T-notes but have maturities of 30 years or longer in some cases.