Treasury Bill

Every financial calculation involving a risk-free rate — from the Capital Asset Pricing Model to bond yield spreads to option pricing — uses the T-bill yield as its empirical proxy for the risk-free return available in the market. The Treasury bill's mechanics, its auction process, its discount pricing, its tax treatment, and its distinction from Treasury notes and Treasury bonds are directly tested on the Series 7 and Series 65 examinations.

The Discount Pricing Mechanism — How T-Bills Work

The Treasury bill is unique among United States government securities in that it is issued and traded not at face value with a coupon rate but at a discount — a price below its face value — with no periodic interest payments during its life. The investor's return is realised entirely at maturity when the Treasury redeems the bill at its full face value.

The minimum purchase denomination for Treasury bills is one hundred dollars, with purchases made in increments of one hundred dollars and a maximum non-competitive purchase of ten million dollars at a single auction. A Treasury bill with a face value of ten thousand dollars purchased at a discount of two percent would be acquired at nine thousand eight hundred dollars. At maturity the investor receives the full ten thousand dollar face value — the two hundred dollar difference between the purchase price and the redemption value is the investor's return.

This discount structure means the Treasury bill's return is expressed in two distinct but related ways — the discount rate and the investment rate. The discount rate — the rate quoted in Treasury auctions — expresses the return as a percentage of the face value over a three hundred and sixty day year. The investment rate — also called the bond equivalent yield or coupon equivalent yield — expresses the same return as a percentage of the actual purchase price over a three hundred and sixty-five day year, making it directly comparable to the yields quoted on coupon-bearing notes and bonds. Because the purchase price is less than face value and the year is expressed as three hundred and sixty-five rather than three hundred and sixty days, the investment rate is always slightly higher than the discount rate for the same T-bill.

A worked example clarifies both measures. A thirteen-week T-bill with a face value of ten thousand dollars is purchased at a discount of five percent on an annualised discount basis. The discount amount equals ten thousand multiplied by five percent multiplied by ninety-one divided by three hundred and sixty — equalling approximately one hundred and twenty-six dollars and thirty-nine cents. The purchase price is ten thousand minus one hundred and twenty-six dollars and thirty-nine cents — equalling nine thousand eight hundred and seventy-three dollars and sixty-one cents. The investment rate equals the one hundred and twenty-six dollar and thirty-nine cent return divided by the nine thousand eight hundred and seventy-three dollar and sixty-one cent investment, multiplied by three hundred and sixty-five divided by ninety-one — producing an investment rate slightly above five percent that is the directly comparable yield for that T-bill.

Available Maturities — The Complete T-Bill Term Structure

Treasury bills are currently issued in the following maturities as specified on the TreasuryDirect website — four weeks, six weeks, eight weeks, thirteen weeks, seventeen weeks, twenty-six weeks, and fifty-two weeks — as well as Cash Management Bills with variable maturities issued at irregular intervals when the Treasury needs to address temporary cash flow gaps in the government's financing.

The four-week, six-week, eight-week, thirteen-week, seventeen-week, and twenty-six week Treasury bills are auctioned weekly. The fifty-two week Treasury bill is auctioned every four weeks — monthly. Cash Management Bills are not sold through TreasuryDirect and are available only through banks, brokers, and dealers.

The historical development of the T-bill maturity spectrum reflects the Treasury's evolving short-term borrowing needs. The thirteen-week and twenty-six week bills have been the core T-bill maturities since 1972. The four-week bill was introduced in 2001. The eight-week bill was introduced in 2018. The seventeen-week bill was introduced in October 2022. The six-week bill was the most recent addition, introduced in 2025 — reflecting the Treasury's ongoing refinement of its short-term financing toolkit to manage cash flows efficiently.

The Auction Process — Competitive and Non-Competitive Bidding

The Treasury sells T-bills through a uniform-price Dutch auction conducted by the Bureau of the Fiscal Service — a process in which all successful bidders pay the same price regardless of the price they individually bid, with that price determined by the competitive bidding process.

Competitive bidders — primarily primary dealers, institutional investors, foreign central banks, and other sophisticated market participants — submit bids specifying the exact discount rate they are willing to accept. Bids are ranked from lowest discount rate — highest price, most favourable to the Treasury — to highest discount rate — lowest price, least favourable to the Treasury. The Treasury accepts bids starting from the lowest discount rate and working upward until the full amount being offered is awarded. The stop-out rate — the highest discount rate accepted — becomes the single uniform auction clearing rate that all successful bidders pay, regardless of the lower rates they individually bid. A competitive bidder may purchase no more than thirty-five percent of the total offering amount at any single auction.

Non-competitive bidders — primarily individual investors purchasing through TreasuryDirect and smaller institutions — do not specify a rate. They agree in advance to accept whatever rate is determined by the competitive auction process. In exchange for accepting the market-clearing rate, non-competitive bidders are guaranteed to receive their full requested amount of T-bills, subject to the maximum purchase limit of ten million dollars per auction. All non-competitive bids are filled first, and their requested amounts are subtracted from the total offering before the competitive awards are determined.

Individual investors can purchase T-bills directly from the Treasury at no cost through TreasuryDirect — the government's online platform at TreasuryDirect.gov — submitting non-competitive bids and having the T-bills credited directly to their TreasuryDirect account at the auction clearing rate. Alternatively, investors can purchase T-bills through banks, broker-dealers, and financial intermediaries who may charge transaction fees but provide the convenience of integration with the investor's existing brokerage accounts.

The Risk-Free Rate Benchmark — T-Bills in Financial Theory

The Treasury bill yield serves as the empirical proxy for the theoretical risk-free rate of return in virtually all quantitative financial models — a role that makes the T-bill conceptually foundational to modern financial theory even for market participants who never directly purchase T-bills.

The risk-free rate is the return available to an investor with absolute certainty — no possibility of loss of principal — against which all other investments must be evaluated in terms of their risk premium. United States Treasury bills satisfy this theoretical requirement more completely than any other instrument because they combine the full faith and credit guarantee of the United States government — the world's reserve currency issuer and the most creditworthy sovereign in global financial markets — with the shortest maturity of any Treasury security, which essentially eliminates interest rate risk for investors holding to the very near-term maturity. A thirteen-week T-bill held to maturity returns a known, certain dollar amount regardless of what happens to interest rates, equity markets, or the broader economy — making it as close to the theoretical risk-free investment as any real-world instrument can achieve.

The Capital Asset Pricing Model — covered in the Security Market Line entry of this dictionary — uses the T-bill rate as the risk-free rate in the formula that the expected return on any security equals the risk-free rate plus beta multiplied by the equity risk premium. The Sharpe ratio — covered in the Sharpe Ratio entry — uses the risk-free rate as the benchmark from which excess return is measured. Option pricing models including Black-Scholes use the risk-free rate as one of the five inputs determining option premiums. Yield spreads on corporate bonds, agency bonds, and municipal bonds are conventionally expressed as the spread above the comparable Treasury yield — a comparison that uses T-bill yields for short-maturity credit instruments.

Tax Treatment — The Federal-Only Exemption

Treasury bill interest income is subject to federal income tax in the year the bill matures — even though the interest is economically accruing during the entire holding period, for tax purposes it is recognised as income in the year of maturity when the face value is received. For a fifty-two week T-bill purchased in December and maturing the following December, the entire return is taxable in the year of maturity rather than being split between the two calendar years of the holding period.

Treasury bill interest is specifically exempt from state and local income taxes under the constitutional doctrine of intergovernmental immunity — the principle that states may not tax the federal government's borrowing costs — codified in 31 U.S.C. 3124. This state and local tax exemption makes Treasury bills and all other Treasury securities more attractive than comparable taxable money market instruments for investors in high-income-tax states — particularly in states like California, New York, and New Jersey where the combined state and local income tax rate on investment income can approach or exceed ten percent. The after-tax yield comparison between a Treasury bill and a taxable money market fund must incorporate this state tax differential to be analytically valid.

Treasury Bills Versus Treasury Notes and Treasury Bonds

The Series 7 and Series 65 examinations directly test the distinctions among the three primary categories of marketable Treasury securities — Treasury bills, Treasury notes, and Treasury bonds — which differ in maturity, interest payment structure, and the mechanism through which they compensate investors.

Treasury bills have original maturities of one year or less — four weeks through fifty-two weeks — are issued at a discount with no periodic interest payments, and the entire return is the difference between the purchase price and the face value at maturity. Treasury bills are zero-coupon instruments.

Treasury notes have original maturities of two, three, five, seven, and ten years — are issued at or near face value — and pay semi-annual coupon interest at a fixed rate throughout their lives until maturity when the face value is also returned. Treasury notes are coupon-bearing instruments with interest payments every six months.

Treasury bonds have original maturities of twenty and thirty years — are structured identically to Treasury notes with semi-annual coupon interest and face value at maturity — but carry the longest maturities of any standard Treasury marketable security, making them the most interest-rate-sensitive segment of the Treasury market. Treasury bonds are also coupon-bearing instruments.

The critical structural distinction is that only Treasury bills are discount instruments — all other Treasury marketable securities including notes and bonds are coupon instruments. This structural difference means that T-bill buyers collect no income during the holding period and receive the entire return at maturity, while note and bond buyers receive regular semi-annual income throughout the holding period and face value at maturity.

T-Bills in the Federal Reserve's Monetary Policy Operations

Treasury bills are the primary instrument through which the Federal Reserve conducts open market operations — the mechanism by which the Fed manages the supply of reserves in the banking system to influence short-term interest rates in pursuit of its dual mandate under 12 U.S.C. 225a.

When the Federal Reserve purchases Treasury bills from primary dealers in the open market — an expansionary open market purchase — it credits the selling dealer's reserve account at the Fed, injecting reserves into the banking system and increasing the supply of federal funds available for overnight lending among banks. This increased reserve supply drives the federal funds rate — the overnight interbank lending rate — downward toward the Fed's target. When the Fed sells Treasury bills to primary dealers — a contractionary open market sale — it debits the purchasing dealer's reserve account, withdrawing reserves from the banking system and putting upward pressure on the federal funds rate.

The Fed's Open Market Desk at the Federal Reserve Bank of New York conducts these operations daily in the Treasury market — and T-bills are the preferred instrument for short-term liquidity management because their short maturities minimise the interest rate risk of the Fed's own portfolio while providing maximum operational flexibility to add or withdraw reserves as needed to maintain the federal funds rate within the Federal Open Market Committee's target range.

Examination Relevance and Key Takeaways

Treasury bills are tested on the Series 7 and Series 65 examinations in the context of government securities, discount pricing, the auction process, the risk-free rate, and the distinctions among Treasury bills, notes, and bonds.

The key points to retain are these.

A Treasury bill is a short-term United States government obligation with original maturity of one year or less — currently issued in maturities of four, six, eight, thirteen, seventeen, twenty-six, and fifty-two weeks plus irregular Cash Management Bills. T-bills are sold at a discount to face value and redeemed at full face value at maturity — the difference is the investor's entire return since T-bills pay no periodic coupon interest making them zero-coupon discount instruments. The minimum purchase is one hundred dollars in one hundred dollar increments with a ten million dollar maximum for non-competitive bids.

T-bills are sold through uniform-price Dutch auctions — competitive bidders specify a discount rate and all successful bidders pay the same stop-out rate determined by the auction — and non-competitive bidders who accept the auction rate are guaranteed their full requested amount. Individual investors purchase through TreasuryDirect at no fee. Treasury bill interest is subject to federal income tax in the year of maturity — exempt from state and local income taxes under 31 U.S.C. 3124 making them more attractive than taxable money market alternatives in high-tax states.

Treasury bills serve as the empirical proxy for the risk-free rate in the Capital Asset Pricing Model, the Sharpe ratio, option pricing models, and all yield spread calculations — because the full faith and credit United States government guarantee combined with the very short maturity essentially eliminates both credit risk and interest rate risk. The critical distinction from Treasury notes and bonds is the discount structure — T-bills are zero-coupon discount instruments with no periodic interest payments while notes and bonds are coupon instruments paying semi-annual interest with face value returned at maturity. Treasury notes carry maturities of two through ten years and Treasury bonds carry maturities of twenty and thirty years — both pay semi-annual coupons unlike the discount T-bill. The Federal Reserve conducts open market operations primarily through T-bill purchases and sales to manage banking system reserves and influence the federal funds rate toward the FOMC target.