How Treasury Bills Generate Returns

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Treasury bills, also known as T-bills, are short-term debt securities sold by the U

T-bills are, in effect, a short-term loan to the government

Un other Treasury-issued securities ( T-bonds and T-notes), T-bills don’t pay periodic interest rates

Instead, T-bills are auctioned by the government at a discount to their face value, and the total return is the spread between the size of that discount (the discount rate) and the face value at maturity

In other words, the yield generated by a T-bill amounts to the difference between what you paid and the face value

When the T-bill matures, the government pays you the full face value of the bond, and you’re free to reinvest that money

This might seem counterintuitive at first, but prices and yields move in opposite directions

To raise the yield on a T-bill, the Treasury must lower the price — thus increasing the spread between the auction price and the face value

Conversely, when the demand for T-bills is high (for example, in times of economic uncertainty), the price increases and the yield goes down

Department of the Treasury, with the standard terms (4, 6, 8, 13, 17, 26 and 52 weeks) sold at varying intervals

T-bills can also be bought and sold on the secondary market

The auction price determines the yield, which can be expressed on an annualized basis as the coupon discount rate

For a more detailed look at how T-bills work, and how to buy them, check out NerdWallet’s beginner’s guide to T-bills

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Learn MoreLearn MoreLearn More the authorRick VanderKnyffRick VanderKnyff is Head of Content, News at NerdWallet

He has worked previously at MSN

Com and the Los Angeles Times