Treasury Bills: Types, Features, Advantages & Disadvantages

When the government seeks to raise funds on the financial market, it issues two types of debt instruments: treasury bills and government bonds. Treasury bills are issued when the government has an immediate need for funds. The interest rate on these bills is established by market forces; they are issued solely by the central government.


In India, Treasury bills were first printed in 1917. They are distributed through auctions that the Reserve Bank of India (RBI) holds on a regular basis. Banks, trusts, institutions, and individuals can all buy T-Bills.


But financial institutions are usually the ones who invest the most in them. Beyond investment products, they play a crucial role in the financial market. The RBI receives treasury bills from banks in exchange for money from repo operations. They can also store it to satisfy their Statutory Liquid Ratio (SLR) requirements.


Therefore, Treasury Bills are a vital monetary instrument used by the Reserve Bank of India. It assists RBI in regulating the economy’s total money supply and in raising funds.



How Do T-Bills Work?


According to the RBI, Treasury bills, often known as T-bills, are short-term debt securities issued by the Government of India and are available in three tenors: 91 day, 182 day, and 364 day. T-bills are money market instruments.


Treasury bills are interest-free securities with zero coupon payments. They are issued at a discount and redeemed at face value when they reach maturity. For instance, a treasury bill worth Rs 100 can be obtained for Rs 95, but the buyer receives Rs 100 when the T-Bill matures. Treasury bill returns are influenced by the economy’s liquidity situation. The returns are higher during the liquidity crisis and vice versa.


Types of Treasury Bills


  • 14-Day T-Bill


These bills mature fourteen days after the date of issuance. They are auctioned off on Wednesday, and payment is made the following week on Friday. The auction is held weekly. These bills are sold in multiples of one lakh rupees, and the minimum investment is also one lakh rupees.


  • 91-Day T-Bill


These bills reach maturity 91 days from the date of issuance. They are auctioned off on Wednesday, and payment is made the following week on Friday. Each week, they are auctioned off. These bills are sold in multiples of Rs.10,000, and the minimum investment amount is Rs.10,000.


  • 182 Day T-Bill


These bills reach maturity 182 days after the date of issuance. They are auctioned on Wednesday, and payment is due the following week on Friday, when the term expires. They are sold at auction every other week. These bills are sold in multiples of Rs.10,000, and the minimum investment amount is Rs.10,000.


  • 364 Day T-Bill


These bills reach maturity 364 days after their date of issuance. They are auctioned on Wednesday, and payment is due the following week on Friday, when the term expires. They are sold at auction every other week. These bills are sold in multiples of Rs.10,000, and the minimum investment amount is Rs.10,000. As stated previously, the holding period for each bill stays unchanged. Treasury bills’ face value and discount rates are subject to periodic adjustment. This depends on RBI’s monetary policy and financial needs, as well as the total number of bids received. In addition, the Reserve Bank of India publishes an auction calendar for treasury notes. Before each auction, it discloses the exact date of the auction, the amount to be auctioned, and the maturity dates.


Features of  Treasury Bill


  • Minimum Investment:

T-bills are available at a minimum investment of Rs 25,000.


  • Issuance:

T-bills are issued in physical form as promissory notes or in dematerialized form.


  • Eligibility:

T-bills can be bought by individuals, corporations, firms, banks, trusts, insurance companies, state governments, and financial organizations.


  • Liquidity:

Treasury bills are fairly liquid negotiable instruments that can be traded. They are available in both the primary and secondary financial markets.


How To Calculate Yield?


In essence, yield measures the annualized rate of return on investment. In the end, all investments should be evaluated by their annualized returns. So, if you made Rs. 3 over 91 days on an investment of Rs. 97, how much would you have made in the whole year at this rate?


The equation is –

Yield = [Discount Value]/[Bond Price] * [365/days until maturity]

          = [3/97]*[365/91]
          = 0.0309*4.010989
          =12.4052 percent


In other words, the T-bill provides a return on investment of 12.4052 percent, but because you held it for 91 days, you will receive this return proportionally.


Advantages of Treasury Bills


  • Risk


Treasury bills are a prevalent short-term government investment backed by the central government. They constitute a liability for the Indian government because they must be paid within a specified time frame. Since they are supported by the government of India, the highest authority in the country, investors have complete peace of mind regarding their investments. The sum must be paid to the investors regardless of the economic downturn.


  • Auction


The RBI typically auctions Treasury bills every week. This permits ordinary investors to make non-competitive bids. This boosts investors’ exposure to the government bond market, resulting in more cash flows to the capital market.


  • Liquidity


Treasury bills have a maximum maturity of 364 days. They assist in raising funds for the economy’s short-term needs. Here, individuals seeking short-term investments can park their assets. Additionally, T-bills are tradable on the secondary market. This enables investors to convert their holdings into cash in the event of a crisis.


Limitation of Treasury Bill


As government-backed debt securities, Treasury bills generate lower returns than other stock market investments. Treasury bills are zero-coupon bonds, meaning they do not pay investors any interest. They are distributed at a discount before being redeemed at face value. Consequently, investors in T-bills receive fixed returns throughout the bond’s tenure, regardless of the country’s economic position.


However, Stock market movements influence the returns generated by stocks, equity funds, debt funds, and debt instruments. As a result, the yield earned by equity, equity funds, debt funds, and debt instruments increases as the stock market rises. Therefore, since equity investment is a risky instrument it also has the potential to give better returns. 


Factors Affecting Treasury Bill Investment Prices


  • Monetary Policy


The monetary policy of the Reserve Bank of India is expected to affect the price of Treasury bills. T-bill interest rates tend to approach the RBI’s interest rate, also known as the Repo rate. Nevertheless, an increase in the repo rate tends to attract investment in other debt securities, resulting in a decline in the T-bill interest rate (due to lower demand). The reduction will continue until the yield on Treasury bills surpasses the repo rate.


T-bill prices and investor returns, like those of other debt securities, can be influenced by a number of variables, including macroeconomic circumstances, investor risk tolerance, inflation, monetary policy, and particular T-bill supply and demand dynamics.


  • Maturity Period


The duration of a Treasury bill’s maturity affects its price. A one-year Treasury bill normally offers a higher rate of return than a three-month Treasury bill. The reason for this is that longer maturities entail greater risk for investors. In order to make up for locking up their money for a longer length of time, investors seek a higher rate of return.


  • Risk Tolerance


The price of a T-bill is also influenced by the risk appetite of an investor. T-bills are less appealing and will be priced lower when the Indian economy is expanding and other debt securities are providing a higher return. T-bills, on the other hand, attract a higher price for their “safe haven” characteristics when the markets and the economy are erratic and other debt assets are viewed as riskier.


How To Buy Treasury Bills?


  • Mutual Funds


If you wish to invest in government bonds, gilt mutual funds may be an easy choice. These mutual funds fall under the debt category and only invest in bonds and fixed-income instruments. It is important to keep in mind that gilt funds differ slightly from bond funds, which might invest in corporate bonds. Government securities are the only investments made by gilt mutual funds. Before making an investment in gilt mutual funds, there are a few factors you should take into account.


One of the most important factors to take into account when investing in gilt mutual funds is the expense ratio. It is crucial to choose a fund having a competitive ratio because a high ratio can reduce your returns. Another crucial factor to take into account before investing is your investment horizon. A portfolio of gilt funds typically matures in three to five years. In order to maximize your investment, you must have a similar investment horizon.


  • RBI Retail Direct


RBI Retail Direct, which was introduced in November of last year (2021), gives investors another way to purchase T-Bills. An individual just needs to go to the RBI Retail Direct website, complete KYC, and connect their savings account. Once you have successfully created an RBI The retail direct account(RDG), the RDG Account will be available for primary market participation as well as secondary market transactions.


T-Bills investments made through RBI Retail Direct have an advantage that you are not required to pay any fees for opening and maintaining an account. 


Government bonds may not be subject to credit risk, but they are still subject to interest rate risk. However, investors should take note that in this situation as well, you must keep onto the bonds until they mature because selling them during an increase in interest rates could result in losses.


  • Demat Account


You may open a trading and demat account with a stock brokers,  with ease, sell and purchase Treasury bills in the secondary market.


To conclude, out of all the above-mentioned methods, gilt mutual funds may be a more suitable option for a novice investor because they provide a diverse portfolio of different types of government securities and help you control volatility.


Difference between T-Bills and T-Bonds?


Treasury Bills Treasury Bonds (Dated G-Securities)
Meaning T-bills are short-term money market securities that the government issues. The government issues long-term capital market securities called T-bonds.
Volatility Price variation is quite low because it matures in a short period. Price may fluctuate because of a longer maturity period.
Types 91 Day Bill, 182 Day Bill, and 384 Day Bill. Fixed Rate Bonds, Floating Rate Bonds, Inflation Indexed Bonds, etc.
Interest Treasury bills are issued at a discounted price. Treasury bonds are not issued at a discounted cost; instead, they are issued at face value and pay interest twice a year.
Maturity Period They are issued for one year or less. They are issued for a period greater than 1 year.



Who Should Consider T-Bills As An Investment?


The Indian government provides Treasury Bills, which are ideal for investors seeking a secure and profitable investment. With the support of the RBI, investors may submit noncompetitive offers. The bidding mechanism for T-bills allows investors to participate by submitting a bid. Prior to issuance, the discount value and par value are made public. For investors, the investing process can be completely transparent. It also contributes to the wealth creation of individuals.


It is suitable for all investors, regardless of expertise level or risk tolerance. Those looking to diversify their portfolios can also utilize it as a safe investment. This can minimize the overall allocation risk of a portfolio.


Companies, corporations, banks, trusts, insurance companies, provident funds, state governments, and financial institutions have access to Treasury bills. Due to the low risk of default, Treasury bills are the safest fixed-income investment in their category. The yield is also predetermined because the amount, issuance date, and maturity date are all fixed. They play a crucial function in regulating the total money supply of the economy.


When investing in bonds, there are a few key factors that you must take into account. Keep in mind that bond interest is entirely taxable, and if you are in a high tax bracket, your tax bill may go up.



Blog last updated on 28.07.2023

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