||Ask Dr. Don
Investing in U.S. Treasury
Dear Dr. Don,
How do Treasury bills work and where can they be bought?
U.S. Treasury bills are short-term debt obligations (securities)
of the U.S. government. A Treasury bill matures within one year.
Treasury notes have maturities up to 10 years, while Treasury bonds
have a final maturity of more than 10, but less than 30, years.
The Treasury hasn't offered a new bond since October 2001.
The government issues new four-week, 13-week and 26-week
T-bills weekly. In the weeks leading up to quarterly tax payment
dates the Treasury may announce and offer cash management bills.
Treasury bills are priced at auction. All winning bidders pay the
same price for the auctioned security.
T-bills are discount securities. That means that a
bill is bought at a discount to its stated or face value. The government
pays the face value at maturity. The interest earned is the difference
between the price paid and the price received on the T-bill when
it is sold or matures. As market interest rates fluctuate, the value
of the security will fluctuate. In contrast, Treasury notes and
bonds pay semiannual interest payments based on the security's coupon
interest rate and its face value.
You can buy T-bills from your stockbroker, or purchase
them using the government's Electronic
Services for Treasury Bills, Notes, and Bonds -- formerly known
as Treasury Direct. The minimum purchase amount is $1,000 (face
value), and T-bills may be purchased in multiples of the $1,000
face amount. Four-week bills and cash management bills cannot be
bought using electronic services.
Buying directly from the U.S. Treasury is commission-free,
but the Treasury does charge a fee of $34 to sell a security prior
to maturity. An annual account maintenance fee of $25 is charged
on accounts with total holdings of more than $100,000.
-- Posted: March 6, 2003