Determining the Yield Percentage of a Treasury Bill (T-Bill)
Government short-term bonds known as Treasury bills (T-bills) have become more alluring due to rising interest rates in recent years. When considering purchasing a T-bill, it's essential to grasp how to calculate its percentage return and contrast it with other types of investments. Let's walk through the steps of calculating T-bill returns:
Understanding Treasury bills (T-bills)
Unpacking Treasury bills (T-bills)
A Treasury bill (T-bill) is a brief-term federal bond with a maturity period below 12 months. T-bills don't offer interest payments but are bought at a lesser price than the face value. For example, a bill worth $1,000 could be purchased for $985 at an auction.
The concept of bonds
Bonds are types of financial securities that offer the holder recurring interest payments. When investing in T-bills, you won't receive ongoing interest. Instead, you'll get back the T-bill's full face value at maturity, which represents both your principal investment and the overall investment return. Unlike stocks and other bonds, T-bill investments are covered by the full backing of the U.S. government, which results in minimal risk.
Step 1: Analysing T-Bill yield
Dissecting T-Bill yield
To evaluate a T-bill, you need the following details:
- The bill's purchase price.
- The bill's purchase date.
- The bill's maturity date.
In the annualized yield calculation, the bill's par value is represented as 100, and the bill's purchase price is expressed as a number smaller than 100 to reflect the implied discount. To calculate yield, subtract the bill's purchase price from its face value, then divide the result by the bill's purchase price, and finally, multiply by 100 to convert it to a percentage. The image below illustrates the aforementioned formula.
Step 2: Evaluating the T-Bill's yield annually
Yearly evaluation of the T-Bill's yield
Once you've found the T-bill's yield, multiply it by 365 and divide the result by the bill's days to maturity. The outcome will provide an annualized yield that will aid in easier comparisons of T-bills and other financial securities.
Step 3: Running an example
Practicing with an example
Suppose you were looking at a Treasury bill with a 26-week maturity and a price of $97.50.
To calculate the bond's yield, subtract 97.5 from 100, then divide by 97.5, finally multiplying by 100 to arrive at a yield of 2.6%.
To annualize the bill's yield, multiply 2.6% by 365, and then divide the result by 182 (the bill's number of days to maturity), resulting in an annualized yield of 5.2%.
Although the yield might appear large, given that interest rates have risen in recent years, Treasury bill rates were close to 5% in 2024.
Related topics in investing
Top 8 Long-Term Bonds to Invest in
Find out why bonds are receiving a great deal of interest from investors at the moment.
Early Investment in Google Stock
Gain guidance on investing in Google (formerly known as Alphabet) stock, and learn about this tech behemoth's ins and outs.
Exploring Patriot Bonds
Discover how Patriot Bonds (EE savings bonds issued between December 2001 and December 2011) function.
Investing in SpaceX in 2024
Learn about the process of investing in Elon Musk's space exploration company.
T-Bill returns final thoughts
T-bills have gained popularity once again after a decade of minimal returns. They could make up a significant portion of your portfolio, especially for those nearing or in retirement. Understanding how to calculate and annualize T-bill returns is essential for making wise portfolio decisions. Engage in thorough analysis of potential investments to develop a personalized financial plan.
Our website has a disclosure policy.
After recognizing the appeal of Treasury bills due to rising interest rates, investors may consider diversifying their portfolios by exploring other types of investments that offer higher returns. Incorporating money into this strategy, one might consider investing in stocks or bonds to potentially increase their earnings.
When comparing various investment options, it's important to evaluate each one's financial performance, taking into account factors such as the annualized yield of Treasury bills or the potential returns from other types of bonds. Calculating and understanding the returns on Treasury bills helps investors make informed decisions about their investments, ensuring they can effectively manage their finance in the long term.
){kind=link}