Treasury Bill

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A Treasury Bill (T-Bill) is a short-term bond issued by the U.S. Government (although state and local governments can issue treasury bills as well) and are issued in order to raise capital for public projects. As they are short-term, T-Bills are issued with 3, 6, and 12 month maturities.

Unlike coupon bonds that pay a stated rate of interest at set intervals, T-Bills are issued at a discount from their face value, so when you receive the face value back at maturity, you receive more than you initially paid for the bond, thus making a profit. For example, if you purchase a $5,000 90 day T-Bill, you might actually pay $4,850 for the bond. When it matures after 90 days, you will get the total $5,000 back. This means that your total return on investment will be 3% ($150/$5,000 =.03)

While T-Bills provide a very low rate of return due to their incredible security, they are popular amongst money market investors for several reasons:

1. Unlike the typical money market invesment, T-Bills are attainable even by the smallest investors because they are issued in denominations as low as $1,000.
2. T-Bills are incredibly safe. Since they are backed by the government (federal, state, or local) you are virtually guaranteed to get your money back. In reality, I like to believe that nothing is guaranteed, but I can't think of a single reason how or why a government would default on its treasury debt obligations (just don't cash out of the bill prior to the maturity date).
3. Interest earned on a T-Bill is exempt from state and local taxes.

Table of Contents

1. Money Market: Introduction
   
2. What is a Money Market?
   
3. Treasury Bill (T-Bill)
   
4. Certificate of Deposit (CD)
   
5. Commercial Paper