US Treasury
Treasury bills (T-bills) are government issued securities to borrow money from the public (like an IOU from the government). As they are backed by government, it is widely accepted as a very safe instrument. However, in some countries where their economy is not as strong and stable, the risk of defaulting is higher. Investors are compensated for taking the risk by granting them a high interest rate (can be as high as 15%). In developed countries where economy is stable, the interest promised is much lower (2-3%). T-bills are considered fixed-income and money market security due to its fixed returns and liquidity nature.
Features:
- Short term, less than a year. Can mature in 3 months, 6 months or a year
- Purchase at a discount and interest payout at maturity – e.g. Pay $97, get back $100 upon maturity and the difference of $3 is the interest earned.
- Interest earned is exempted from tax
- Can be sold before maturity but subjected to market price
- Usually held by third party custodian bank
- Low or even no commissions or custodian charges
Who usually invests in T-bills?
Risk averse investors where capital preservation is more important than returns, and are looking for a short term investment and yet, maintain a good degree of liquidity. Not likely to be a good avenue to invest during high inflation period, where the interest earned may not be sufficient to hedge against inflation.
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