Investing in ETFs For Dummies
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For short-term investing, Treasury bills (called T-bills) are the nation’s most marketable security. T-bills are issued with 3-, 6- or 12-month maturities. When you purchase a T-bill, you pay less than the face (or par) value.

When the T-bill matures, you receive par value of the T-bill. T-bills aren’t like coupon bonds, which pay interest in increments. If you purchase a three-month T-bill with a par value of $10,000 for $9,800 and hold it until maturity, you receive $200 in interest.

Treasury bills are sold to the public at an auction every Monday at the New York City Federal Reserve Bank. T-bills are issued through competitive bidding (tendering an offer) at these auctions. Bids of more than $1 million are considered competitive bids. Bids of less than $1 million are always classified as noncompetitive bids.

T-bills are sold first through competitive bids. Remaining T-bills are then sold noncompetitively for the average price of the winning bids. Individual and institutional investors alike can bid on T-bills. T-bills also are sold on the secondary market by broker-dealers who buy and sell them.

T-bills, which are issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000, and $1 million, are considered risk-free because they’re backed by the full faith and credit of the U.S. government. T-bills additionally are free from state and local taxes. However, federal taxes are due on earned interest.

The two primary limitations of T-bills are their lower rates of return and early cash outs that can be less than your original investment. Rates of return for T-bills are lower than money market funds or CDs because of their lack of risk, and cashing out a T-bill before it matures may mean not getting all your cash back. For example, if you’re forced to sell your T-bill when interest rates have increased during the term of the T-bill, the resale value of your T-bill will likely decrease.

Interest rates on T-bills are listed online and in most major daily newspapers. T-bills that mature in a year or less are listed at the discount rate, which is the rate that takes into consideration the time value of money. The discount rate is shown as the “Bid/Offer” rate. The “Yield” column is expressed in a way that lets you compare the equivalent yields of one Treasury security with another. In other words, you don’t need to do any additional math to compare a T-bill that matures in a month with one that matures in six months.

As an example, a $10,000 Treasury bill with a one-year maturity that’s quoted at a rate of 2.5 percent provides $250 in interest and sells at a discount of $9,750. The effective yield is $250 divided by $9,750, or 2.56 percent. The same 2.5 percent T-bill with six months to maturity provides $125 in interest ($250 divided by 2) and sells for $9,875. The effective yield is ($125 divided by $9,875) times 2, or 2.53 percent.

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