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Treasury bills

T-bills or Treasury bills, are U.S. government bonds with a maturity of one year or less.

Expanded Definition

T-bills are short-term loans to the U.S. government. They come in terms of 1-month, 3-months, 6-months, and 1-year. They carry a par value of $1,000 and up to $5 million worth can be bought at a time.

These are known as a zero coupon bond. They do not pay interest payments, but instead are sold at a discount to par value such that when the purchase amount is compounded at the yield, it increases to the par value by the maturity date. For instance, if the yield is 2.04% on a 6-month T-bill, it would sell at $989.90. In six months, when it matures, the investor would receive $1,000, which represents a 2.04% annual yield. $10.10 / $989.90 = 1.02% x 2 = 2.04% (multiply by 2 because this is a 6-month bill, but yields are expressed on an annual basis).

T-bills are backed by the credit of the U.S. government, and thus are considered as close to a risk-free investment. The yield for the appropriate Treasury bill (or note or bond) is used in the capital asset pricing model as part of the determination of the cost of capital.

The current and recent historical yields can be obtained from the U.S. Treasury at http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates.shtml.

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