How to Calculate the Price of Treasury Bills
Original post by Diane Perez of Demand Media
Federal governments sell Treasury bills, also called T-bills, as a way to raise short-term funds. The United Kingdom issued the first T-bill in 1877. In the United States, you can buy Treasury bills with maturity dates ranging from several days up to one year. The minimum purchase amount is $100. The maximum limit varies: $5 million in non-competitive auctions or 35 percent of the offering amount in competitive auctions. You can buy T-bills directly from the Treasury website or through a bank or broker. Calculate the price of Treasury bills to decide if the investment should be part of your portfolio.
Research the discount either online (see Resources) or call your bank or brokerage. The government sells T-bills at less than face value, known as a discount from par. The rate changes weekly except for the 52-week bills and the cash-management bills. The U.S. Treasury auctions the 52-week T-bills every four weeks. They auction cash-management bills irregularly.
Calculate the discount amount. For example, the Treasury advertises $10,000 T-bills at a discount of 1.5 percent: $10,000 x .015 = $150. The discount in this example is $150. If the discount is zero, then you will pay face value and will not earn interest. Institutional investors may buy Treasury bills at face value as a way to park money when the stock market is volatile. The government issuing the T-bills guarantees them.
Deduct the discount from the face value: $10,000 -- $150 = $9,850. The price of the Treasury bill is $9,850. You buy the T-bill at the discounted price, and then the government pays you the face value at maturity. The difference between the discount price and the par amount (face value) is interest.
Calculate the interest rate to determine if it is competitive with other possible investments. Divide the interest you will earn by the actual cash price you paid. Using the above example: $150 / $9,850 = 0.015 = 1.5 percent interest.
- Treasury Direct: Treasury Bills
- Treasury Direct: Treasury Bills in Depth
- Business Dictionary: Treasury Bill (T-bill)
About the Author
Diane Perez is a writer who contributes to various websites, specializing in gardening and business topics, and creates sales copy for private clients. Perez holds a Bachelor of Science in education from the University of Miami.
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