A DETAILED NOTE ON TREASURY BILLS

Treasury bills are short term money market instruments. Issued by RBI to curb liquidity
shortfalls. It is a promissory note with a guarantee of payment at a later date. The funds
collected are usually used for short term requirements of the government. It is also used to
reduce the overall fiscal deficit of the country.

 Treasury bills or T-bills have zero-coupon rates, i.e. no interest is earned on them.
Individuals can purchase T-bills at a discount to the face/value. Later, they are redeemed at a
nominal value, thereby allowing the investors to earn the difference. For example, an
individual purchase a 91-day T-bill which has a face value of Rs.100, which is discounted at
Rs.95. At the time of maturity, the T-bill holder gets Rs.100, thus resulting in a profit of Rs.5
for the individual.

Therefore, it is an essential monetary instrument that the Reserve Bank of India uses. It helps
RBI to regulate the total money supply in the economy as well as raising funds.

Types of Treasury Bills

Four types of treasury bills are auctioned.

 14-day Treasury bill; These bills complete their maturity on 14 days from the date of issue.

 91-day Treasury bill; These bills complete their maturity on 91 days from the date of issue. 

182-day Treasury bill; These bills complete their maturity on 182 days from the date of
issue. 

364-day Treasury bill; These bills complete their maturity 364 days from the date of issue.

As mentioned above, the holding period for each bill remains constant.

Features of Treasury Bills

Form; Treasury bills can be issued in a physical form as a promissory note or dematerialized
form by crediting to SGL account (Subsidiary General Ledger Account).

Minimum Bid Amount; Treasury bills are issued at a minimum price of Rs.25000 and in the
same multiples thereof.

Issue Price; Treasury bills are issued at a discounted price. However, they are redeemed at
par value at the time of maturity.
Eligibility; Individuals, companies, firms, banks, trust, insurance companies, provident fund,
state government and financial institutions are eligible to purchase T-bills.  

Highly Liquid; Treasury bills are highly liquid negotiable instruments. They are available in
both financial markets, i.e. primary and secondary market.

Auction Method; The 91 day T-bill follows a uniform auction method, whereas, 364 day T-
bill follows a multiple auction method.

Zero Risk; The yields are assured. Hence, they have zero risks of default.

Day Count; For treasury bills, the day count is 364 days in a year.

Besides this, it also have other characteristics like market-driven discount rate, selling
through auction, issued to meet short term cash flow mismatch, assured yield, low transaction
cost, etc.

How to calculate the yield on Treasury bills?

To calculate the yield, the comparison of par value to its face value is the first step.
Additionally, investment returns are more useful when expressed on an annualized basis. The
next step is to use the maturity period to convert the return to an annual percentage.

You can calculate the yield of treasury bills through the following formula –

Y= (100-P)/P * [(365/D)*100], where

Y – Yield/ return percentage of T-bill

P – The discounted price of the T-bill purchased

D – Tenure of T-bill

Let’s understand this with an illustration. If RBI issues a 91- Day treasury bill at the
discounted price of Rs.97 while the face value of the bill is Rs.100, the yield of the security
can be determined as follows –

Yield = [(100-97)/97] *(365/91*100)

         = 12.40%

By annualizing the returns, a shorter Treasury bill can be compared with the following:

 Long-dated Treasury bill

  Government bond

 Corporate bond

 Treasury bond

 Any other type of fixed income investment instrument.

 Advantages and limitations of treasury bills

Treasury bills investments come with many advantages as it provides safety and security to
its investors.

Risk-Free

Treasury bills is a popular short term government security. The Central government backs
them. They act as a liability to the Indian government as they need to be paid within a
stipulated time.

Therefore, investors have total security on their funds invested as they are backed by the
government of India, I.e. the highest authority in the country. The amount has to be paid to
the investors even during the crisis.

Highly Liquid

Treasury bill has a highest maturity period of 364 days. They help in raising money for short
term requirements for the economy. Individuals who are looking for short term investments
can park their funds here. Also, T-bills can be sold in the secondary market. This allows
investors to convert their holding into cash during any emergency.

Bidding

Treasury bills are usually auctioned by RBI every week. This allows the retail investors to
place their non-competitive bids. This increases the exposure of investors to the government
bond market, which creates higher cash flows to the capital market.