Treasury bills, also known as T-bills, are short-term debt instruments with maturity terms of four, 13, 26 and 52 weeks. T-bills are usually issued at a discount to par or face value. 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. Compute the yield using either the discount yield method or the investment yield method.
Get the purchase price. The U.S. Treasury auctions the four-, 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 (see Resources), banks and brokers. Investors can hold on to the bills until maturity or sell them before maturity.
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 days for a 90-day T-bill because the official maturity term is 13 weeks [13 x 7 = 91].
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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].
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.