Meaning of treasury bills


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Treasury bills are obligations of the government. They are sold on a discount basis for that reason. The investor does not receive an actual interest payment. The return is the difference between the purchase price and the face (par) value of the bill.

 

The treasury bills are issued only in bearer form. They are purchased, therefore, without the investor’s name upon them. This attribute makes them easily transferable from one investor to the next. A very active secondary market exists for these bills. The secondary market for bills not only makes them highly liquid but also allows purchase of bills with very short maturities. As the bills have the full financial backing of the government, they are, for full practical purposes, risk free. This negligible financial risk and the high degree of liquidity make their yield lower than on marketable securities. Due their virtually risk-free nature and because of active secondary market for them, treasury bills are one of the most popular marketable securities even though the yield on them is lower.

 


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