Part 1: What is a T-Bill, How it Works
Part 2: Pros and Cons of T-Bills, Should You Invest in a Treasury Bill
Introduction to Treasury Bills for Kids and Teens
This video explains the concept of a treasury bill in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about t-bills, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is a Treasury Bill
- How do T-Bills work
- What are the advantages of investing in Treasury Bills
- What are the disadvantages of investing in Treasury Bills
- Should you invest in T-Bills
What is a Treasury Bill?
A Treasury Bill, or T-Bill, is a short-term debt security issued electronically by the U.S. government.
When you buy a T-Bill, you lend money to the US government for a specific amount of time – from 4 weeks to a year.
After this time, the government pays you back your initial investment, plus some extra amount which is your profit.
How do T-Bills work?
T-Bills are typically sold at a discount to their par value or face value, and are redeemed at par value at maturity. This difference between your purchase price and the par value is your interest or earnings from T-Bills.
Let’s say you buy a $1,000 T-Bill for $950 that matures in 6 months. You’d give the government $950 today to purchase the T-Bill, and you’d receive the face value of $1,000 in 6 months when the T-Bill matures.
This $50 difference is your profit. Remember, unlike other fixed income investments like Treasury Bonds, Treasury Bills do not pay interest periodically.
The profit from T-Bills is exempt from state and local income taxes, although you still have to pay federal income tax.
They have a minimum purchase of $100 and can be bought in increments of $100 directly from TreasuryDirect.Gov during an auction, through your existing bank account or brokerage account, or from the secondary market.
You can hold the bill until maturity or sell anytime in the secondary market.
In treasury direct auctions, you can buy T-Bills through a competitive bid where you decide your desired yield, or non-competitive bids where you accept the market yield.
What are the advantages of investing in Treasury Bills?
T-Bills are backed by the full faith and credit of the U.S. government, meaning there is no risk of losing your investment due to default.
They are also liquid, which means you can easily buy or sell them in the secondary market.
The maturities of T-Bills are under a year, making them a good choice if you want a short-term investment.
They have a low minimum investment of just $100. They offer predictable returns that are comparable with high yield savings accounts.
Lastly, the profit earned from T-Bills is exempt from state and local income taxes.
What are the disadvantages of investing in Treasury Bills?
Since T-Bills are very low-risk investments, they also have far lower returns than riskier options like corporate bonds or the stock market.
And like other fixed income securities, T-bills are subject to interest rate risk: if you need to sell your T-Bill before maturity and the interest rates have risen, you might lose money.
Also, it’s possible to actually end up losing purchasing power if inflation exceeds your returns. Lastly, federal income tax still applies to your profit.
Should I invest in Treasury Bills?
T-Bills are a great choice for short-term investors who want a risk free investment with high liquidity, like if you’re saving for an emergency fund or a down payment on a house.
But if you aren’t investing for the short term and are okay with more risk, alternatives like corporate bonds or the stock market are better since they’ll give you far higher profits over the long term.