What is Treasury Bill: Methods of Bidding and Types

Treasury bills are the instruments of money market that are categorized as short-term debt instruments. The residents of the country can invest in these bills at discounted price and get higher face value of bill at the end of maturity for making profits.

In this article, we will be discussing what is treasury bill in detail.

Table of Contents

• What is treasury bill?
• Methods of bidding 
• Types of treasury bills
• Characteristics

What is Treasury Bill?

Treasury bills or t bills are the money market instruments that the Government of India issues as a promissory note with a guaranteed repayment date. The funds collected through treasury bills help in meeting short-term government requirements. This helps in reducing the overall fiscal deficit of the nation. 

These are the short-term borrowing tools with a minimum of 1 day to a maximum of 364 days available at zero interest rate. Treasury bill is issued at a discount to a published nominal value of the government security. The Government Treasury bills can be opted for by individuals at a discount to the face value of the security. These can then be redeemed at a nominal value, allowing investors to gain from the difference. 

How does a treasury bill work?

Let us understand this with an example. A 91-day treasury bill with rupees 100 as its face value can be purchased at a discounted price of rupees 95. On the maturity date, individuals can receive the entire value of Rs. 100 that helps them gain rupees 5. These are issued at maturities of 4, 8, 13 and 52nd weeks. These auctions feature varying maturities every week except for the 52nd week T bill sold every four weeks. Their discount rate is calculated during the time of the auction.

Government issues a T bill at a discount to the face value. The investor purchasing the T-bill is loaning money to the government with a promise to repay the complete face value of the bill at maturity. Suppose, the government issues T-bill with $1000 as face value and maturity of 90 days. When the bill matures in 90 days, the investor will receive the entire $1000 face value which represents a 2% return over the period of 90 days. 

Yield Rate on Treasury Bills

The percentage of yield that is generated through treasury bills is calculated using the formula Y = (100-P)/P x 365/D x 100. Here, Y is the return per cent; D is the bill tenure; P is the discounted price at which the security is purchased. 

Let us now consider the example of a treasury bill. When RBI issues a 91-day treasury bill having a face value of rupees 100 at the discounted value of rupees 97. The yield on such securities will be as follows:

Yield = (100 – 97) / 97 x (365 / 91) x 100 = 12.4%

Methods of Bidding for Treasury Bills

There are two methods of bidding for Treasury bills including competitive and non-competitive bids. 

1. Competitive bids: In such types of bids, the investor will specify the discount rate that they are ready to accept. In case, the bid is better than the discount rate that is set in the auction, the order will be completed. Else the bid will either be rejected or partially filled.

2. Non-competitive bids: These are similar to a market order where the investor accepts the discount rate determined at auction. These bids can be placed via bank, TreasuryDirect or broker. 

Types of Treasury Bills

Here, the holding period is the same for every type of treasury bill issued. However, the face value and discount rates of these bonds change periodically based on the fund requirements and monetary policy of the RBI along with the total number of bids placed. Treasury bills are of the following types:

Characteristics of Treasury Bills

The following are the characteristics of treasury bills:

1. Zero coupon securities

A zero coupon bond or accrual bond is a debt security that does not pay any interest. It, instead, trades at a deep discount. This offers profit at maturity when the bond is redeemed at full face value. Some bonds transform into zero-coupon instruments when financial institutions them of the coupon and repackage them as zero-coupon bonds. 

G-Sec treasury bills do not offer any interest on total deposits. Rather, investors gain capital gains from investing. On redemption, the entire par value of the bond is paid to the investors which allows them to realize significant profits on total investments. 

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2. Minimum investments

According to RBI regulations, at least 25,000 rupees must be invested by individuals who want to procure short-term treasury bills. Any higher investment must be made in the multiples of rupees 25,000. In the case of a 14-day t bill, the minimum investment must be at least 1 lakh rupees.

3. Trading 

The investment forms an important part of the treasury bill details. RBI, on behalf of the central government auctions securities on a weekly basis in the market. Investors can choose to procure these government assets via depository participant commercial banks or through other registered primary dealers. Here, security transfer follows the T+1 settlement process.