Money Market Funds Investments – Treasury Bills

The United States federal government issues a variety of debt securities to meet funding needs.  Treasury bills are short-term securities issued by the U.S. Treasury.  The US Treasury issues Treasury bills as one of the debt securities to fund a portion of the US public debt.  Treasury bills are the most marketable money market security.  Their popularity is mainly due to their simplicity, safety and liquidity.  Essentially, Treasury bills are a way for the U.S. government to raise money from the public.

Treasury bills are short-term securities that mature in one year or less from their issue date.  They are issued with three-month, six-month and one-year maturities.  Treasury bills are purchased for a price that is less than their par or face value.  When the Treasury bills mature, the government pays the holder the full par value.  Effectively, the interest is the difference between the purchase price of the security and what you get at maturity.  For example, a 90-day Treasury bills at $9,800 and held it until maturity, would earn $200 on your investment.  This from pricing is different from coupon bonds, which pay interest semi-annually and return the face value at maturity.

There are some characteristics of Treasury bills that differentiate them from other money market instruments.  Treasury bills have almost total lack of default risk.  Treasury bills are generally considered to be free of default risk because they are obligations of the federal government.  Though most all money market instruments are safe and secure even the highest grade of commercial paper or certificates of deposit will have some degree of default risk.  The market for Treasury bills is well established and very liquid.  Their high degree of liquidity refers to the ability of investors to convert them into cash quickly at a low transactions cost.  And Treasury bills receive favorable tax status.  Unlike other money market instruments, the income earned on Treasury bills is exempt from all state and local income taxes.

The Treasury sells bills at regularly scheduled auctions to refinance maturing issues and to help finance current federal budgets.  It also sells bills on an irregular basis to smooth out the uneven flow of revenues from corporate and individual tax receipts.  Treasury bills, as well as notes and bonds, are issued through a competitive bidding process at auctions.  Treasury bills generally provide the lowest yield of any of the short-term money market instruments, but provide the investor the highest degree of security and liquidity.

This entry was posted on Tuesday, January 6th, 2009 at 1:40 pm and is filed under Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.