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Understanding United States Treasury Bills (T-Bills)A U.S. Treasury Bill is a short-term debt obligation backed by the U.S. government with an original maturity of one year or less.?New Treasury bills (T-Bills) are auctioned weekly for one month (4 weeks or 30 days), three month (13 weeks or 90 days) and six month (26 weeks or 180 days) maturities. Treasury Bills with one year (52 weeks or 360 days) maturities are auctioned every 28 days. The Treasury also offers “Cash Management Bills” with odd maturities such as 7 days or 101 days. These cash management bills are only available to large, institutional investors. T-bills are issued through a competitive bidding process at a discount from par. Rather than paying fixed interest payments like?conventional?bonds, the appreciation of the bond on maturity date (i.e., the par value minus the discount) provides the return to the holder. Previously issued T-Bills can be can be redeemed before maturity, i.e., they can be bought and sold in the “secondary market” by investors through brokerages and banks. Thus an investor in the secondary market can find virtually any length maturity they desire less than 365 days. Because of their short term nature, T-Bills are not callable.T-Bill PricesT-Bills are issued at a discount to their par or face value. This means that a T-Bill is sold for less than its face value at maturity. This difference between the purchase price and the amount received at maturity equals the investor’s “interest” on the security. T-Bills carry a par value of $1,000. For example, a 52-week T-Bill with a $1,000 par value might be sold initially for $990. When it matures, the investor will receive the full $1,000. The extra $10 the investor receives is their investment return for purchasing the T-Bill. The actual price, in the “primary market,” when a T-Bill is first issued is determined when the Treasury conducts an “auction.” The Federal Reserve conducts the auctions on a competitive-bid basis. A portion of the issues is set aside for investors who do not wish to enter a specific bid, but who will purchase the securities at the average price paid by competitive bidders. Thus, for these investors, their T-Bill prices are set by a non-competitive bid in the auction, essentially giving them the average going competitive rate for that auction. The auctions are announced in advance in most major newspapers and through press releases. Once an auction is announced, financial institution may submit a bid for the security. The auction announcement details: Amount of the security being offeredAuction dateIssue dateMaturity dateTerms and conditions of the offeringNoncompetitive and competitive bidding close timesWhen participating in an auction, there are two bidding options - competitive and noncompetitive. Competitive bidding is limited to 35% of the issue amount for each bidder, and a bidder specifies the rate or yield that is acceptable. Noncompetitive bidding is limited to purchases of $5 million. With a noncompetitive bid, a bidder agrees to accept the rate or yield determined at auction. At the close of an auction, the Treasury accepts all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order in terms of their yields until the quantity of accepted bids reaches the offering amount. All bidders will receive the same rate or yield at the highest accepted bid. Auction “interest rate” results appear in the financial press, such as the Wall Street Journal: Wall Street Journal on line data for February 8, 2011 T-Bill auctionTreasury bill auction results: Auction Date: 2/8/2011 52-WEEK?Latest1 Week AgoHighLow4 weeks0.135%0.160%0.175%0.030%13 weeks0.150%0.150%0.180%0.065%26 weeks0.175%0.170%0.265%0.150% For additional examples of recent auction announcements and auction results go to the following Treasury sites: Interest RatesT-Bills interest rates are less than CD’s, money market accounts, or corporate bonds of the same maturity. This decrease in rates is due to the increase in safety associated with T-Bills. Taxes on T-BillsThe interest earned on T-Bills is included in Federal income taxes in the year the bill matures. T-Bill interest is exempt from state and local incomes taxes. This tax treatment makes T-Bills more attractive to investors in states with higher income tax rates. When compared to a bank CD offering an identical rate, investors who must pay state or local income tax would end up with more after-tax income with a T-Bill. Treasury Department Published T-Bill Rates (Secondary market rates)The T-Bill data below is from a U.S. Treasury web site: Please refer to the footnotes below for definitions of reported “interest” rates.4 WEEKS13 WEEKS26 WEEKS52 WEEKSDATEBANK DISCOUNTBANK EQUIVALENTBANK DISCOUNTBANK EQUIVALENTBANK DISCOUNTBANK EQUIVALENTBANK DISCOUNTBANK EQUIVALENT02/01/110.160.160.150.150.180.180.250.2502/02/110.150.150.160.160.180.180.260.2602/03/110.140.140.140.140.180.180.270.2702/04/110.130.130.150.150.180.180.280.2802/07/110.130.130.160.160.180.180.280.2802/08/110.140.140.150.150.180.180.310.3202/09/110.110.110.140.140.180.180.300.30Wednesday Feb 9, 2011, 5:02 PMFootnotes: Daily Treasury Bill Rates: These rates are the daily secondary market quotation on the most recently auctioned Treasury Bills for each maturity (4-week, 13-week, 26-week, and 52-week) for which the Treasury currently issues new Bills. Market quotations are obtained at approximately 3:30 PM each business day by the Federal Reserve Bank of New York. The Bank Discount rate is the rate at which a Bill is quoted in the secondary market and is based on the par value, amount of the discount and a 360-day year. The Bank Equivalent, also called Bond Equivalent, the Coupon Equivalent, or the Investment Yield, is the bill's yield based on the purchase price, discount, and a 365- or 366-day year. The Bank Equivalent can be used to compare the yield on a discount bill to the yield on a nominal coupon bond that pays semiannual interest. ................
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