United States treasury bills - Essay Example

United s Treasury Bills United s government issues bills for raising money on the short term basis and these bills are called the treasury bills of the United States. Governments need money to finance their operations and to keep running their working machinery, whenever they feel themselves short of money; they make an arrangement to raise some amount from the private sector. In order to raise money as a debt from the private sector, treasury bills are issued to the investors, which are short term usually for a period less than one year.

These bills bear a fixed rate of return on the terms of the bill and are to get mature within the time span of less than one year. Treasury bills can be defined in the following way: Anegotiabledebtobligationissued by theU.S. governmentand backed by itsfull faith and credit, having amaturityof one year or less.U.S. TreasuryBills areexemptfrom state andlocaltaxes. Thesesecurities do notpayacoupon rateofinterest, and the interest earned is estimated by taking the difference between thepricepaidand thepar valueof thebond, and calculating thatrate of returnon anannual basis.

TreasuryBills are considered the safest securities available to the U.S.investor, and so theyieldson these securities are considered the risk-freerateofreturn. These are also calledBillorT-BillorTreasury bill. This definition describes the true meaning of the treasury bills issued by the Unites States government. Treasury bills are the most trusted and respectable bills among the investors because these are backed up by the government itself. Investors have full confidence that their investment is safe and that they are going to get the fixed amount as a return on the investment.

As compared to other investments which may be more lucrative to the eye of the investor in terms of the return on investment, treasury bills are the safest because there is extremely low risk involved in these investments. Another good feature of treasury bills is that these are absolutely exempt from state and local taxes; therefore, all the return on the investment is the return of the investor to enjoy. One special feature of these bills is that they do not pay a coupon rate of interest on the investments made as other investments do.

Securities other than the treasury bills pay a coupon rate of interest as promised by the market conditions but treasury bills pay a fixed amount instead, which is higher than the amount paid to the government when the purchase of the bill was made. For instance, if a bill is purchased for $9,800 then the amount at which this bill will be sold by the investor to the government will be $10,000. The interest rate will be calculated on this amount on the annual basis as is the calculation of normal interest rates on other securities purchased from the market.

Treasury bills are sold by the unites states government in the $100 up to the maximum limit of purchase of 5 million dollars with the maturity time of one month, three months and six months usually. Treasury bills are issued through a competitive bidding process at a discount from par which means that rather than paying fixed interest payments like the conventional securities, investors will enjoy a good return from the bond through the appreciation of the bond. Therefore, it is understood that the basic purpose of the treasury bills is the generation of positive yield on investment at the date of maturity.

As, it is short term investment therefore, no regular payments are made to the holder, instead a onetime payment of the full amount of the bonds is made to the holder. Holder of the bill takes advantage because of the discounted price it paid when the bill was purchased and hence getting back the full amount which the bill bears. The main purpose of the issuance of these bills is the generation of cash inflow for the national treasury of the United States government. When the cash balance of the government is too low that it find hard to finance its own daily transactions and workings then the government may plan to resort to the private sector to raise money.

These bills provide a bridge through which government can raise money from the market.