Understanding Treasury Bills (T-Bills) and Calculating Your Rate of Return
Treasury Bills, commonly known as T-Bills, are short-term debt instruments issued by the U.S. Department of the Treasury. They are considered among the safest investments in the world because they are backed by the full faith and credit of the U.S. government. T-Bills are sold at a discount from their face value and mature at their face value, with the difference representing the investor's earnings.
How T-Bills Work
When you purchase a T-Bill, you pay less than its face value. For example, you might buy a T-Bill with a face value of $1,000 for $980. When the T-Bill matures (at the end of its term, which can be 4, 8, 13, 17, 26, or 52 weeks), you receive the full face value of $1,000. The profit you make is the difference between the face value and the purchase price.
Calculating Your Rate of Return
The rate of return on a T-Bill is a crucial metric for understanding its profitability. It tells you how much you've earned relative to your initial investment. The calculation takes into account the discount, the face value, and the time to maturity.
Here's the formula used in this calculator:
Rate of Return = [(Face Value – Purchase Price) / Purchase Price] * (365 / Days to Maturity) * 100
- Purchase Price: The amount you paid to acquire the T-Bill.
- Face Value: The amount you will receive when the T-Bill matures.
- Days to Maturity: The number of days remaining until the T-Bill matures.
Example Calculation
Let's say you purchase a T-Bill with a face value of $1,000 for $980, and it matures in 90 days.
- Purchase Price = $980
- Face Value = $1,000
- Days to Maturity = 90
Using the formula:
Rate of Return = [($1,000 – $980) / $980] * (365 / 90) * 100
Rate of Return = [$20 / $980] * (365 / 90) * 100
Rate of Return = 0.020408 * 4.0555 * 100
Rate of Return ≈ 8.27%
This means that over the 90-day period, your investment yielded approximately an 8.27% annualized rate of return. This calculator helps you quickly determine this figure for any T-Bill investment.