What Are Treasury Bills And How Do They Work?

What Are Treasury Bills And How Do They Work?

The financial markets can be highly volatile at the best of times. While this opens great opportunities for traders and investors, it also carries a lot of risk that some people might not be comfortable with. 

Depending on your risk tolerance, you may be highly speculative or conservative with your investments. 

Conservative and risk-averse investors typically invest in fixed-income securities, such as treasury bonds and bills. However, a bulk of such investments is made up of institutional “smart money”, as they are low-risk investments guaranteed by the government. 

Treasuries greatly vary in terms of their time frame and interest rates. Treasury bills, or T-bills, are used to finance the short-term needs of the U.S budget and are emitted in larger denominations. 

If you are curious about fixed-income treasuries and T-bills in particular, this Investfox article is for you.

How Treasury Bills Work

Treasury Bills (T-bills) are short-term debt securities issued by the United States Department of the Treasury to raise funds to cover the U.S. government's short-term financing needs. 

T-bills are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government, making them virtually risk-free. 

Treasury bills are typically held until maturity, due to their short lifespan. 


The U.S Department of the Treasury auctions T-bills on a regular basis, typically with maturities of 4 weeks (1 month), 8 weeks (2 months), 13 weeks (3 months), 26 weeks (6 months), and 52 weeks (1 year). 

The Treasury determines the auction schedule and the terms of the bills, including the interest rate (discount rate) at which they will be sold on the market. 


T-bills are sold at a discount to their face value. When you buy a T-bill, you pay less than its face value (also called the par value or principal amount). 

Investors can buy T-bills from the TreasuryDirect website, which is the official seller sponsored by the U.S government. 

The difference between the purchase price and the face value is your return on the investment. 

Maturity And Redemption 

At the end of the T-bill's maturity period, it matures, and the investor receives the face value of the bill. 

For example, if you bought a 3-month T-bill with a face value of $1,000 at a discount price of $990, you would receive $1,000 when the bill matures in three months. 

The difference between the face value and the purchase price is the interest income generated from the investment. 

Interest Calculation 

The interest income on a T-bill is calculated as the difference between the face value and the purchase price. 

Unlike traditional bonds that pay periodic interest (known as coupon payments), T-bills do not make interest payments during their term. Instead, the interest is effectively paid to the investor when the bill matures. 


T-bill investments are not subject to local and state taxes, but are taxed at a federal rate. 

The interest income is taxed at the federal income tax rate. However, investors do not receive interest payments until the bills mature. Therefore, tax obligations arise when the T-bills mature and the investor receives the face value. 

Pros And Cons Of Investing In T-bills

Investing in treasury bills comes with its unique sets of advantages and disadvantages. Investors need to carefully consider each of these factors to decide whether investing in T-bills is the best course of action for their investment objectives. 


  • Near-zero risk of default due to sponsorship from the federal government
  • T-bills have a low minimum investment requirement of $100 
  • Interest income from T-bills is exempt from state and local income taxes 
  • Investors can easily buy and sell T-bills on secondary markets 


  • T-bills offer low returns compared to other fixed-income securities 
  • T-bills pay no interest until they reach maturity 
  • Investors who seek a stable source of cash flow can be inhibited by T-bills 
  • When interest rates rise, T-bills become less attractive

Key Takeaways From What Are Treasury Bills And How Do They Work

  • Treasury bills, or T-bills, are short-term financial instruments issued by the Treasury Department to finance the short-term needs of the economy
  • T-bills are not interest-bearing securities and investors profit from the difference between the purchasing price and face value 
  • When interest rates rise, treasury bills may lose their attractiveness in the eyes of investors, as their yields are considerably lower than bonds 
  • Treasury bills are investments with the lowest degree of risk, as they are sponsored by the government and have a short lifespan 

FAQs On What Are Treasury Bills

Are treasury bills good investments?

Treasury bills are viable investments during a period of low interest rates. T-bills have a very low yield, which becomes unattractive when bond yields increase across the board. 

Are treasury bills different from bonds?

Treasury bills have lower yields and shorter time to maturity than bonds. When interest rates increase, bonds become considerably more attractive than T-bills. 

How to buy treasury bills?

Investors can buy treasury bills from the TreasuryDirect website, or using their brokerage accounts. 

Treasury bills are not subject to state and local taxes and are taxed at the federal income level.