Treasury bills, also called T-bills, are low-risk investments backed by the U.S. government that mature in one year or less. T-bills are typically sold at a discount from the face value. For instance, you might pay $9,600 for a bill worth $10,000 at maturity, earning you $400 in interest.
Discount yield calculates the investor's percent of return based on the bill's face value. Bills can be bought from your local bank, or from a government service called Treasury Direct.
Use a specific formula to figure out the discount yield on your Treasury Bill. The formula to calculate discount yield is [(FV - PP)/FV] * [360/M]. This formula means the purchase price (PP) of the bill is subtracted from the face value (FV) of the bill at maturity. That number is the discount amount of the bill and is then divided by the FV to get the percentage discount off of face value. This number is multiplied by the maturity (M) of the bill after the maturity is divided into 360.
Subtract the purchase price (PP) from the face value (FV) of the bill. The face value is the value of the bill at maturity. For example, if the FV is $10,000 and the PP is $9,600. The discount yield equation would be: discount yield = [(10,000 - 9600)/FV] * [360/M]. The discount amount of the bill would be $400.
Divide the discount amount by the face value (FV). This will give you the percentage of discount. Using the same example, the equation would be: discount yield = [(10000 - 9600)/10000] * [360/M]. The discount is 4 percent off of face value.
Divide 360 by the number of days until maturity (M). Maturity is when your bill will reach its full value. Again using the same example, the equation would be: discount yield = [(10000 - 9600)/10000] * [360/190]. When 190 is divided into 360, the answer is 1.8947 which is the number of times 190 days can occur in one year. For example, a bond with a maturity in one year would result in 1.
Multiply the percentage of discount by the number of times the maturity term occurs in a year. Using the same example, the equation would be: discount yield = 0.04 * 1.8947. The discount yield is 7.58 percent. By purchasing a $10,000 Treasury Bill for $9,600, you will earn 7.58 percent in interest.