Investing in T-bills (Part 1)
Posted by Mark on February 5, 2024 at 14:37 | Last modified: March 15, 2024 15:36I find an advantage to investing in Treasury Bills, but I am still trying to wrap my brain around how big a benefit this is, to what extent it may be utilized, and/or how much of it is real or just perceived.
Here are some basics courtesy of Investopedia:
> A Treasury bill [T-bill]… is a short-term U.S. government debt obligation
> backed by the Treasury Department with a maturity of one year or less.
> T-bills are usually sold in denominations of $1,000… These securities are
> widely regarded as low-risk and secure investments.
>
> The U.S. government issues T-bills to fund various public projects, such
> as the construction of schools and highways. When an investor purchases
> a T-bill, the U.S. government effectively writes an IOU to the investor.
> Thus, T-bills are considered a safe and conservative investment since the
> U.S. government backs them.
>
> T-bills are generally held 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.
>
> T-bills can have maturities of just a few days, but the maturities listed by
> the Treasury are are four, eight, 13, 17, 26, and 52 weeks.
>
> T-bills are issued at a discount from the par value (also known as the face
> value) of the bill, meaning the purchase price is less than the face value of
> the bill. So, for example, a $1,000 bill might cost the investor $950.
>
> When the bill matures, the investor is paid the face value—par value—of
> the bill they bought. If the face value amount exceeds the purchase price,
> the difference is the interest earned for the investor.
>
> T-bills do not pay regular interest payments as with a coupon bond, but a
> T-bill does include interest, reflected in the amount it pays when it matures.
>
> The interest income from T-bills is exempt from state and local income
> taxes. However, the interest income is subject to federal income tax.
>
> New issues of T-bills can be purchased at auctions held by the
> government on the TreasuryDirect site. These are priced through a
> bidding process, with bidders ranging from individual investors to
> hedge funds, banks, and primary dealers. These purchasers may then
> sell the bills to other customers in the secondary market…
>
> You can also buy Treasury bills through a bank or a licensed broker
> [i.e. secondary market]. Once completed, the purchase of the T-bill
> serves as a statement from the government that says you are owed
> the money you invested, according to the terms of the bid.
I will get more into the details of investing with T-bills next time.
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