Treasury Bills (T-Bills)

Imagine you lend money to the government for a short period, say 91 days, and at the end, the government pays you back a slightly higher amount than what you lent. You don’t receive periodic interest payments; instead, you earn by the difference between the amount you lend and the amount you get back. This is the basic concept of Treasury Bills (T-Bills) — short-term government debt instruments used to manage short-term liquidity needs.

What Are Treasury Bills?

Treasury Bills are short-term debt instruments issued by the government with maturities of less than one year. Unlike bonds, T-Bills do not pay periodic interest (coupons). Instead, they are sold at a discount to their face (par) value, and the investor receives the face value upon maturity. The difference between the purchase price and face value represents the investor’s earnings.

Key Features of T-Bills:

1. Maturity Periods: Common maturities are 91 days, 182 days, and 364 days.
2. No Periodic Interest: T-Bills are zero-coupon instruments; investors earn through capital appreciation.
3. High Liquidity: They are highly liquid and actively traded in the money market.
4. Low Risk: Backed by the government, T-Bills are considered among the safest investments.

Example:

Suppose the government issues a 91-day T-Bill with a face value of ₹1,00,000 at a discounted price of ₹98,000. At maturity, the investor receives ₹1,00,000, earning ₹2,000 as return.

Why Are T-Bills Important?

1. Cash Management : Governments use T-Bills to manage short-term cash flow needs and liquidity.
2. Investment Tool : Investors use T-Bills as a low-risk, short-duration investment option.
3. Benchmark Rates : Yields on T-Bills often serve as benchmark rates for other short-term interest rates in the economy.

The Reserve Bank of India (RBI) issues T-Bills through auctions, and they form an essential part of the country’s money market. Corporates, banks, and mutual funds commonly invest in T-Bills for short-term liquidity management.

Treasury Bills offer investors a safe, short-term investment option, providing liquidity and security. They are foundational instruments in the fixed income market, especially for managing short-term funds. In the next chapter, we will discuss Credit Risk in Fixed Income Investments, focusing on the risk of default and how it impacts bond investing.