How Does a T-Bill Work?

The U.S. Treasury Department auctions off short-term debt obligations in the form of treasury bills (T-bills) to investors. In 2008, the Treasury changed the minimum and multiple amount from $1,000 to $100, making it easier for small investors to purchase T-bills. Investing in T-bills offers advantages and disadvantages. Before investing in T-bills, understanding their nature and how to purchase the bills is important.

Nature of T-Bills

T-bills mature in one year or less, and terms are 4, 13, 26 and 52 weeks. The federal government sells T-bills at a discount, meaning the investor buys the bills for less than face value, the government repays the face value amount at maturity and the difference between the two equals the interest the investor earned. For example, you may purchase a $5,000, 1-year T-bill for $4,700. At maturity, the government pays you $5,000, so you earned $300 in interest. The federal government taxes interest earned on T-bill investments, but state and local governments do not. When you purchases a T-bill, it is issued in electronic form. Individuals may sell T-bills before the maturity date.

How to Buy

Investors can purchase T-bills at auction from TreasuryDirect ( TreasuryDirect is the only financial services website authorized to allow you to purchase T-bills directly from the Department of Treasury. The U.S. government establishes a predetermined number of T-bills to sell. Investors bid on T-bills that allow them to earn interest. Some investors buy T-bills at face value simply as a safe investment in which to place money when the markets are down for long periods of time. Individuals desiring returns on their investments place their money in T-bills when rates of returns are acceptable, which means the rate on a T-bills is higher than alternative investments. Banks and brokers sell T-bills on the secondary market but often times charge a commission fee. T-bills purchased on the primary market directly from the source offers the best rate of return.


T-bills are virtually risk free investments, which many investors find beneficial. T-bills are one of the safest places to invest your money. While other investments experience volatility, T-bills remain constant because they offer a guaranteed rate of return. Some investors choose to place their money in T-bills during a prolonged bear market. The minimum purchase amount for a T-bill is low, so even small investors can purchase T-bills and benefit from their risk-free nature.


A disadvantage of T-bills is that investors must pay taxes on earned interest, which is taxed at ordinary income rates. Investors have other investment options that offer tax-free benefits, such as municipal bonds. Another disadvantage is that T-bills offer low returns. A low return is the tradeoff for placing your money in a relatively safe investment. Certificate of deposits (CDs) and high-yield savings accounts may offer higher interest rates with slightly higher risks. Selling T-bills before they mature may prove difficult because they are not very liquid assets.