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How do Treasury bills work, and how do you buy them?

Name ____________________ Date __________

Key ideas

  1. You pay less now and get face value later. A $10,000 bill might cost $9,810 at auction. At maturity you get $10,000. The $190 difference is the interest.
  2. Terms run from 4 to 52 weeks. Bills come in 4, 6, 8, 13, 17, 26 and 52 week terms. The minimum is $100, then any $100 step.
  3. Interest skips state and local income tax. You owe federal tax on the interest but no state or local income tax, which helps most in high-tax states.

Vocabulary

Treasury bill
A short-term loan to the US government, lasting 4 to 52 weeks. You buy it below face value and get the full face value at maturity.
FDIC insurance
US government protection that repays your deposits if an insured bank fails, up to $250,000 per depositor, per bank, per ownership category.
Brokerage account
An investment account where you can buy and sell stocks, bonds, ETFs and mutual funds. It has no special tax benefits.
Certificate of deposit
A bank deposit that pays a fixed rate for a set term, like 6 months or 5 years, with a penalty if you take the money out early.

Work it out

Marcus has $9,810 for a tuition bill due in 7 months. He buys a $10,000 26-week T-bill at an example auction price of $98.10 per $100. His state income tax is 5%.

  1. Price paid at auction
  2. Interest at maturity
  3. Face value paid back
  4. Same interest from a CD
  5. 5% state income tax
  6. CD interest after state tax

Check yourself

  1. You buy a $5,000 bill for $4,900. How much interest do you earn at maturity?

    • A. $49
    • B. $100
    • C. $490
    • D. $5,000

  2. Which tax does T-bill interest avoid?

    • A. Federal income tax
    • B. State and local income tax
    • C. All income taxes

  3. You bought a bill on TreasuryDirect 20 days ago. What can you do with it?

    • A. Sell it on TreasuryDirect
    • B. Transfer it to your broker today
    • C. Cash it at your bank
    • D. Hold it; transfers need 45 days

Your turn

Pick one savings goal with a firm date in the next year. Look up the latest auction result on TreasuryDirect for the term that ends just before that date, and compare its rate, after your state tax, with your savings APY.

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Answer key

How do Treasury bills work, and how do you buy them?

Work it out

  1. Price paid at auction$9,810
  2. Interest at maturity$190
  3. Face value paid back= $10,000
  4. Same interest from a CD$190
  5. 5% state income tax− $10
  6. CD interest after state tax= $180
  1. $98.10 per $100 on a $10,000 bill is $10,000 × 0.981 = $9,810. At maturity he gets $10,000, so he earns $10,000 − $9,810 = $190.
  2. That is $190 ÷ $9,810 = 1.937% for 182 days. Times 365 ÷ 182, that is about 3.88% a year.
  3. A CD paying the same $190 would owe $190 × 5% = $9.50, about $10, in state tax. Both owe federal tax.

Check yourself

  1. B. $100 You get the face value at maturity. $5,000 − $4,900 = $100 is the interest.
  2. B. State and local income tax Interest on Treasury bills is subject to federal income tax but exempt from state and local income taxes.
  3. D. Hold it; transfers need 45 days New bills bought on TreasuryDirect must be held at least 45 calendar days before they can be transferred or sold.