| treasury bills, notes and bonds? please help?

treasury bills, notes and bonds? please help?

Nichole asked:


am i doing this right….. if i invest $1000 in a treasury bill at a discount rate of 4.790% and the investment rate is 4.930%, then i will pay $952.10 to buy the bill and i will get $1049.30 when it matures?… therefore making a profit of $97.20

if thats not right please tell me how much i’ll pay, and how much i’ll get in return for a $1000 investment

thanks!!

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Comments

3 Responses to “treasury bills, notes and bonds? please help?”

  1. muncie birder on May 27th, 2009 3:53 pm

    You have it half correct. You do buy t-bills at a discount. The bills come in $1000 increments. When they come due, you receive $1000. You do buy them at a discount. $952.10 sounds about correct for a 6 mo bill. Treasury notes and bonds are sold differently. A $1000 note or $1000 bond sells for an issue price of $1000 normally. Actually it may sell at a slight discount or premium depending on the auction. You then receive interest payments twice a year. When the bond or note matures you receive $1000. Note: t-bills do not pay interest payments. The interest is imputed from the discount.

  2. Eggolas M on May 30th, 2009 5:20 pm

    Please remember that if he’s buying a 6-month Treasury Bill at a 4.79 discount rate, the price would have to reflect that he’s only lending the government the money for 6 months, not an entire year.

    If I remember how to use a HP 12-C is, the purchase price at a yield of 4.93% would be 97.594. The TBILLYIELD function in Excel uses the formula:

    TBY = (100-PR)/PR x 360/DSM, where DSM is the days to maturity (in this case I used180).

  3. Alan on June 1st, 2009 3:29 pm

    The formula, according to the treasury website is

    Face value * 1 - (days * discount rate / 360). They give a specific example for 6 months that uses 182 days, not 180. So, using a 4.79% discount rate on a six month bond as an example, what you would pay is $1,000 * (1 - (.0479 * 182 / 360)) or $975.78. You’d get $1,000 26 weeks later. The $24.22 difference would be the interest. Investment rate on this issue would be (interest / price * days in the year / days the bill is issued for. So for the above issue, it would be $24.22 / $975.58 * 365/182, or about 4.98%. It looks like the issue you are quoting is somewhere close to a three month issue (maybe a little longer). The first link links to the discount rate calculation, the second links to the investment rate calculation.

    Other part of your question…treasury bills are one year or less, treasury notes are 2-10 years, treasury bonds are longer than 10 years. Treasury bills don’t pay formal interest…the interest is built into the discount. Notes and bonds pay interest every six months.