The Differences Between a Commercial Bill & Treasury Bill

The Differences Between a Commercial Bill & Treasury Bill
Money market instruments offer investors different benefits as well as risks.

Commercial Bills

Commercial bills, commonly referred to as "commercial paper," are unsecured, short-term debt instruments that a corporation or other private organization uses to ensure it has adequate cash on hand to cover operating costs. Commercial bills are typically sold in denominations of $1 million and up. They usually have very short maturities, often maturing overnight, and are typically issued at market interest rates.

Treasury Bill

Treasury bills, also known as T-bills, are U.S. government debt securities with a maturity of less than a year. They are sold in denominations of $1,000 and up, usually with a maturity of one, three or six months. T-bills don't come with an interest rate attached to them; instead, Treasury bills are sold through competitive bidding, and they pay face value at maturity. The holder's return, therefore, is the difference between the price paid and the face value. Say you pay $995 for a $1,000 T-bill with a six-month maturity. At maturity, you receive $1,000. Your return is $5, or 0.5 percent of $1,000, in six months -- the equivalent of a 1 percent annual return.

Difference in Risk

Treasury bills are a lower-risk investment than commercial bills for one simple reason: It's far less likely that the U.S. government will default on its debt obligations than a corporation will do the same. No Treasury bills have ever gone into default, whereas there will always be some company or another going into bankruptcy. Treasury bills are backed by the "full faith and credit" of the U.S. government -- a government that has the power to raise taxes or print money to repay investors. Commercial bills, on the other hand, are essentially backed by the reputation of the company that issued them; investors have only that company's promise to repay.

Differences in Return

To get investors to accept higher risk, you have to promise them a greater potential return. Treasury securities are widely considered the lowest-risk securities available, so they can give investors a low return. (In fact, the rate of return paid by Treasuries is referred to in finance as the "risk-free" rate.) Any debt that involves higher risk than Treasuries -- which is just about any debt -- must pay a higher return than Treasuries. So it is with commercial bills. The return offered by a company's commercial bills depends on the market's view of how risky they will be. Solid, established companies with fairly low levels of existing debt will usually be able to pay less interest on their commercial paper than young, troubled or debt-ridden companies.