Treasury bills have a maturity of less than one year and no interest payments, while Treasury bonds have a maturity of over 10 years and semiannual interest payments. Both are considered safe investments backed by the US government, with Treasury bills being less risky. Treasury rates are calculated from both, and the yield curve shows anticipated returns over time, with an upward slope in normal situations and an inverted curve in times of economic crisis.
Treasury bills and Treasury bonds are securities sold by the United States Department of the Treasury. There are two main differences between these types of problems. The first difference is that treasury bills have a maturity of less than one year, while treasury bonds have a maturity of more than 10 years. The second difference is that treasury bills have no interest payments, and treasury bills have semiannual interest payments.
Both treasury bills and treasury bonds have well-defined maturity dates. Treasury bills represent approximately one-third of the outstanding US government debt and are issued weekly, with maturities of three months, six months, and one year. Treasury bonds are auctioned on Mondays and payment is due the following Thursday. Treasury bonds are issued four times a year, in February, May, August, and October, with maturities of 15, 20, and 30 years.
Treasury bills are sold at a discount, with the gain reflected solely in the difference between the face value and the discount price. The benefit from purchasing a Treasury bond is reflected in the difference between the face value and the discount price, as well as the sum of the semiannual interest coupon payments. Both T-bills and treasury bonds are considered the safest possible investments an investor can make because they are backed by the United States government. Their shorter term is the reason treasury bills are widely considered the less risky of the two.
Treasury rates are calculated from treasury bills and treasury bonds, and reflect the interest rates at which the United States government can purchase US dollars. An interesting correlation between treasury bills and treasury bonds is illustrated in the yield curve. The yield curve shows anticipated returns, or return on investment, over time and is calculated using a process known as the bootstrap method, which calculates the zero rate for a range of securities.
As you might expect, the return on an investment is usually higher when money is invested over a longer period. In this normal situation, the graph slopes upward, with lower returns in the short term, from three months to one year, and higher returns in the long term, from five to 30 years. In rare moments of economic crisis, the yield curve inverts, known as backwardation. In this situation, it is considered riskier to hold securities for the long term.
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