Treasury Bills vs Bonds
Treasury bills and bonds are both investment securities issued by the government in order to raise funds for the running of the government and to pay off any outstanding government loans. The major similarity between these securities is that they are issued by the same party, and any individual who purchases these securities is essentially lending money to their country’s government. Regardless of their similarities, treasury bills and bonds are quite different to each other in terms of their characteristics. The following article offers a clear overview of what is each type of security is and provides a comprehensive explanation of how they are different to each other.
Treasury Bills (T-bills)
Treasury bill is a short term security, with maturity of usually less than one year. T-bills issued by the U.S. government is sold in denominations of the highest being $5 million, and the lowest being a $1000, in between with a number of other denominations. The maturity of these securities also vary; some mature in one month, three months and six months.
The return to an investor of a treasury bill is not from interest paid like in most bonds (interest on bonds are called coupon payments). Rather, the investment return is through the appreciation of the price of the security. For example, the price of a T-bill is set at $950. The investor pays the T-bill at $950 and waits for it to mature. At maturity, the government pays the bill holder (investor) $1000. The return that the investor would have made is the difference of $50.
Treasury Bonds (T-bonds)
Treasury bonds, on the other hand, are of a longer period of time and usually have maturity of longer than 10 years. The returns for these types of bonds are through interest, and T-bonds are usually sold with a fixed interest rate assigned. Interest on T-bonds are usually paid semi-annually, meaning that investment returns will be obtained by an investor every 6 months. Since T-bonds are a longer investment, they require investors to tie up funds for a much longer period of time, which may act as an opportunity cost against investing in a more attractive investment vehicle.
Treasury Bills and Bonds
Both treasury bills and bonds are loans given to the government, and are, therefore, considered to be the least risky of all investments. However, since the risk undertaken by investors is minimal, the returns are also very low in comparison to riskier securities that offer better returns.
Treasury bills offer better liquidity to its investors because funds are held up for a shorter period of time, whereas treasury bonds require funds to be held for a number of years which can make them less attractive to potential investors.
Summary
Treasury Bills vs Bonds
- Treasury bills and bonds are both investment securities issued by the government in order to raise funds for the running of the government and to pay off any outstanding government loans.
- Treasury bill is a short term security, with maturity of usually less than one year.
- Treasury bonds,on the other hand, are of a longer period of time and usually have a maturity of longer than 10 years.
- Both treasury bills and bonds are loans given to the government, and are, therefore, considered to be the least risky of all investments.
Leave a Reply