The Corner

by Bart Ward

U.S. Treasury bills or T-bills are the most marketable of all money market instruments. T-bills represent the simplest form of borrowing: the government raises money by selling bills to the public. Investors buy the bills at a discount from the stated maturity value. At the bill’s maturity, the holder receives, from the U.S. Treasury, a payment equal to the face value of the bill. The difference between the purchase price and ultimate maturity value constitutes the investors’ return on their money.

T-bills with initial maturities of 4, 13, 26 and 52 months are auctioned on a regular schedule. They are sold in denominations of $1,000 up to $5 million. Sales are conducted via auction, at which investors can submit competitive or noncompetitive bids. A competitive bid is an order for a given quantity of bills at a specific offered price. The order is filled only if the bid is high enough relative to other bids to be accepted. A noncompetitive bid is an unconditional offer to purchase bills at the average price of the successful competitive bids.

The Treasury rank-orders bids offering price and accepts bids in order of descending price until the entire issue is absorbed by competitive and non-competitive bids. Competitive bidders face two main dangers: if they bid too high they overpay for the bills. Conversely, they may bid too low and be shut out of the auction. Bidders who are non-competitive will pay the average price for the issue. In addition, non-competitive bids are accepted up to a maximum of $1 million per bid.

Individuals can purchase T-bills directly at auction or on the secondary market from a government securities dealer. These bills are very liquid, meaning that they can be bought or sold very easily. They are issued at a discount and are paid in cash at full value or may be used in payment at full value for new bills. The difference between the discount price and par (full value) is considered income and federally taxed as such. However, the income earned on T-bills is exempt from all state and local taxes, another characteristic distinguishing them from other money market instruments.

Quote of the Week: “If you can buy all you want of a new issue, you do not want any; if you cannot obtain any, you want all you can buy.”—Rod Fadem, Oppenheimer & Company

Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.


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