Treasury Bills vs Bonds
People usually save part of their income to be invested into something that will give them additional income or gain. They can be invested in real estate, stocks, mutual funds, Forex, gold, or government securities.
Securities are financial instruments that are issued by a government. They are low-risk investments since they are backed by the government. They are traded on the secondary mortgage market wherein stocks, bonds, options, and securities are bought and sold after being offered in an Initial Public Offering (IPO) in the primary market.
There are four kinds of marketable securities:
Treasury Notes which mature between one to ten years with interest paid every six months.
Treasury Inflation-Protected Securities which mature in 5, 10, and 30 years with a constant interest rate. The principle rises and falls according to the Consumer Price Index (CPI) which is used to measure inflation.
Treasury Bills (T-Bills) which mature in one year or in less than one year. Instead of paying interest at maturity, the par value of T-Bills is discounted.
Weekly auctions of T-Bills are held with a $100 minimum purchase required. They are redeemed every Thursday with financial institutions such as banks as the largest purchasers. T-Bills are identified by their Committee on Uniform Security Identification Procedures (CUSIP) numbers.
T-Bills are the least risky investments compared with other securities and bonds being offered to investors. They can be purchased online and paid through online or Internet banking. Here is the formula for the computation of the yield of T-Bills:
Discount Yield = (face value-purchase price/face value) x (360/days till maturity) x 100%
Treasury Bonds (T-Bonds) which mature in 10 to 30 years. Unlike T-Bills, T-Bonds pay interest every six months. Like T-Bills they are also sold at auction but with a minimum denomination of $1,000.
T-Bonds are debt obligations issued by a government which backs its credit and are exempt from taxes. The amount that is raised from T-Bonds is considered as a loan of the government which it uses to fund projects.
Like the T-Bills they are traded in the primary and secondary markets. The disadvantage of T-Bonds is that it has a long maturity period, and the money invested cannot earn as much interest as it should have if invested somewhere else. The interest is fixed, and this kind of bond is not callable, that is, it cannot be redeemed before maturity.
Summary:
1.Treasury Bills or T-Bills are government securities which mature in one year or less while Treasury Bonds or T-Bonds are government securities that mature in 10 years or more, 30 years at the most.
2.T-Bills do not pay interest. Instead, their par value is discounted at auction. T-Bonds pay interest every six months.
3.The minimum denomination for T-Bills is $100 while the minimum denomination for T-Bonds is $1,000.
4.Both are less risky compared to other investments since they are secured by the government, but T-Bills offer an earlier return of investment than T-Bonds which cannot be redeemed before their maturity dates.