Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Investing in U.S. Treasury bills

Dear Dr. Don,
How do Treasury bills work and where can they be bought?
Annette American

Dear Annette:
U.S. Treasury bills are short-term debt obligations (securities) of the U.S. government. A Treasury bill matures within one year. Treasury notes have maturities up to 10 years, while Treasury bonds have a final maturity of more than 10, but less than 30, years. The Treasury hasn't offered a new bond since October 2001.

The government issues new four-week, 13-week and 26-week T-bills weekly. In the weeks leading up to quarterly tax payment dates the Treasury may announce and offer cash management bills. Treasury bills are priced at auction. All winning bidders pay the same price for the auctioned security.

T-bills are discount securities. That means that a bill is bought at a discount to its stated or face value. The government pays the face value at maturity. The interest earned is the difference between the price paid and the price received on the T-bill when it is sold or matures. As market interest rates fluctuate, the value of the security will fluctuate. In contrast, Treasury notes and bonds pay semiannual interest payments based on the security's coupon interest rate and its face value.

You can buy T-bills from your stockbroker, or purchase them using the government's Electronic Services for Treasury Bills, Notes, and Bonds -- formerly known as Treasury Direct. The minimum purchase amount is $1,000 (face value), and T-bills may be purchased in multiples of the $1,000 face amount. Four-week bills and cash management bills cannot be bought using electronic services.

Buying directly from the U.S. Treasury is commission-free, but the Treasury does charge a fee of $34 to sell a security prior to maturity. An annual account maintenance fee of $25 is charged on accounts with total holdings of more than $100,000.

-- Posted: March 6, 2003