If you're looking for a low-risk investment with a decent rate of return in the short term, a Treasury bill may be exactly what you need. Read on to learn more about these investment tools and how people make money using them.
What is a Treasury bill?
When the United States government needs to raise money, it can't simply issue stock like a publicly traded company. Instead, it has to offer a debt issue.
Unlike stocks where you'd own a portion of the company offering the shares, with a debt issue you simply have made a loan to the entity in question, with a promise for it to repay its debt under terms spelled out by the borrower.
A Treasury bill is a short-term debt obligation issued by the government and therefore backed by the government. The government backing makes them very attractive investments for people who are extremely risk-averse.
How do Treasury bills work?
Treasury bills are generally sold at online auctions in increments of $100. They don't pay interest directly, and instead offer a discount to the buyer, who is then able to cash them in at maturity for the full face value. For example, if you bought a $100 T-bill, you might pay $96 to buy it originally, earning $4 at maturity when you cash it in for $100.
Treasury bills mature very quickly compared to many investments, and you can choose T-bills with maturity lengths as short as a month or as long as a year. Although there is no state or local tax on your gains, there is a federal tax that will be due, so that's important to keep in mind.
Treasury bills vs. Treasury notes vs. Treasury bonds
The Treasury offers a variety of debt instruments for investors, and they can be a little bit confusing because they all sound so similar. This is because they actually are very similar, and you're absolutely right in thinking that.
The main difference between Treasury bills, Treasury notes, and Treasury bonds is the length of maturity. For Treasury bills, you can expect them to mature within a year (but again, you can buy them with much shorter maturity dates). Treasury notes mature between two and 10 years. Treasury bonds currently mature between 20 and 30 years, but maturity lengths of 50 to 100 years have been proposed.
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Why Treasury bills matter to investors
Treasury bills are a special kind of investment for people who are hoping to grow their money with absolutely no real risk involved. Certificates of deposit, for example, feel like a really solid deal, but there's always a very small chance that the bank will go belly up, and you may lose any unearned interest when the dust settles.
Treasury bills can't do that -- they're backed by the full faith and credit of the United States government. As long as you hold them to maturity, they do as they say they will. The only situation in which they may not perform is if the government literally collapses, at which point we all have much bigger problems than whether or not our T-bills are paying.
Because they're so secure, T-bills are a great way to add some very solid investments to a portfolio of more risky investments, like tech stocks or cryptocurrencies. You can't be sure if tech stocks will hold, especially if they're start-ups, but an appropriately designed portfolio anchored by something like a T-bill can balance any losses you may experience.
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