Treasury bills are short-term debt securities issued by the U.S. Government. They are issued in lengths of four weeks (30 days), three months (90 days), six months (180 days), and one year (360 days). However, the one year bill is currently no longer issued. Treasury bills are known as a zero coupon, or discount security, since it pays the interest and principal at maturity.

The rates listed on Treasury bills are known as discount rates. However, it is important know two things when purchasing Treasury bills:

1. The discount rate is annualized
   
2. The Treasury assumes that a year has 360 days
   

Calculations

Example

Suppose you wanted to buy a $100,000 three month Treasury bill at 5%. Using the formulae above:

The discount rate would be $1,250, hence, you would pay $98,750 when purchasing the bill.

The annualized yield would be 5.13%. However, your yield over that 90 day period would be one fourth of that amount, which would be 1.28%.

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