Can somebody explain the pricing to me on T-Bills?

[vi edit]

current T-Bill rates

Okay, I know that the "rates" they offer are actually discount off of par value. Does that mean that a 3.50 asking bid means a discount of 3.5% off the purchase price?

So, if you want to buy $10,000 in T-bills, your purchase price is actually $9,650? You pocket $350 (minus taxes) after the bill matures?

Do I have that right?

 

[qaa541]

If you go to treasurydirect.gov, you can see the yields of t-bills. Conveniently, it calculates it as $you pay (discount rate) per $100 (par value).

The discount rate is per year, so if you buy a t-bill with a maturity of less than a year(they all are), it will be a fraction of that amount. So a 182 day(1/2 year) t-bill will pay 1.75%(half of 3.5) effective interest on your money.

So if you buy a 182 day $10,000 t-bill at a discount rate of 3.50%, you get $10,000 worth of t-bills at a 1.75% discount. So you get a $175 discount for your $10k = $9825 purchase price.

This is how I understand it, and just know I've never actually bought t-bills before so I could be wrong.

FYI - I-bonds (savings bonds) are paying 4.8% apy now. If you can hold for one year you can redeem it with only 3 mo interest penalty. If you can hold it 5 years, there is no penalty.

 

[Zenmervolt]

Lemme dig out my Bloomberg access card and I'll write up a T-Bill trade ticket. I should be able to figure it out from there.

ZV

 

[vi edit]

The discount rate is per year, so if you buy a t-bill with a maturity of less than a year(they all are), it will be a fraction of that amount. So a 182 day(1/2 year) t-bill will pay 1.75%(half of 3.5) effective interest on your money.

Ahhhh...

Gotcha. Thanks!

 

[Zenmervolt]

OK, a Buy of 6 month (03/09/06 expiry) T-Bills at a 3.5% discount rate will cost $982.40. (Minimum order quantity with a Bloomberg ticket is 1,000.)

That's a total discount amount of $17.60. Very slightly higher than just plain half of 3.5% (1.76% vs 1.75%), for most purposes dividing the period in two will suffice for the estimation though.

ZV