Treasury bills, also known as T-bills, are short-term debt instruments with maturity terms of four, eight, 13, 26 and 52 weeks. T-bills are usually issued at a discount to par or face value, and the investor gets the face value back on maturity. The **difference between the face value and the purchase price** is the interest, also known as the yield. T-bills are sold in increments of $100, which is also the minimum purchase.

## Two Types of Calculations

You can calculate the interest on T-bills (the yield) by using either the **discount yield method** or the **investment yield method**. Both types of computations use the same three values – the face value, the purchase price and the maturity of the issue.

The discount yield method compares an investor's return on investment to the face value of a bill. The investment yield method compares an investor's return on investment to the purchase price of a bill. When you use the discount yield method, you run the risk of understating yields as compared to using the investment yield method.

## Obtaining the Purchase Price

The U.S. Treasury auctions the four-, eight, 13- and 26-week T-bills every week, and publishes the average, high and low prices. The 52-week T-bills are auctioned every four weeks. They can be purchased directly from the **U.S. Department of Treasury's TreasuryDirect website** (TreasuryDirect.gov), **banks and brokers**. Investors can hold on to the bills until maturity or sell them before maturity.

## Calculating by Discount Yield Method

Calculate the interest rate using the discount yield method. The formula is: **[100 x (FV - PP) / FV] x [360 / M]**, where FV is the face value, PP is the purchase price, 360 is the number of days used by financial institutions to compute the discount yield of short-term investments and "M" is the maturity in days. Note that "M" is equal to **91 day**s for a 90-day T-bill because the official maturity term is 13 weeks [13 x 7 = 91].

For example, if the average price of a 90-day T-bill, with a par value of $1,000, is $991.50, the yield or interest rate using the discount yield method is 3.363 percent: [100 x ($1,000 - $991.50) / $1,000 x (360 / 91) = 100 x 0.0085 x 3.95604 = 3.363].

## Calculating by Investment Yield Method

Calculate the interest rate using the investment yield method. The formula is: **[100 x (FV - PP) / PP] x [365 / M]**. Note two differences with the discount yield method: First, the yield is calculated as a percentage of the purchase price rather than the par value; and second, the number of calendar days is used: 365 for regular years, 366 for leap years.

For the same T-bill example, the interest rate using the investment yield method is 3.439 percent: [100 x ($1,000 - $991.50) / $991.50 x (365 / 91) = 100 x 0.008573 x 4.010989 = 3.439]. This method results in a **slightly higher yield than the discount yield method**.