What is a 90-Day Treasury Bill?
A 90-Day Treasury Bill (T-Bill) is a short-term government debt instrument that matures in 90 days and is issued at a discount to its face value. It represents a low-risk investment backed by the full faith and credit of a national government.
Key takeaway: The 90-Day Treasury Bill is a secure and highly liquid investment option commonly used by investors seeking safety, stability, and predictable returns.
Definition
A 90-Day Treasury Bill is a government security that matures in three months and pays no interest, instead offering returns through the difference between its purchase price and face value.
Why It Matters
The 90-Day Treasury Bill plays a crucial role in the global financial system by influencing short-term interest rates, serving as a benchmark for money market instruments, and offering investors a safe haven during market volatility.
Key Features
- Maturity period of 90 days (approximately three months).
- Sold at a discount from face value rather than paying regular interest.
- Considered a risk-free investment due to government backing.
- Widely traded in secondary markets, ensuring high liquidity.
- Used by central banks to manage monetary policy and short-term rates.
How It Works
- Issuance: Governments issue 90-day T-Bills through auctions to raise short-term funding.
- Discount Pricing: Investors buy below face value (e.g., $9,800 for a $10,000 bill).
- Maturity: At the end of 90 days, the government repays the full face value.
- Yield Calculation: The investor’s return equals the difference between purchase and maturity prices.
- Market Trading: T-Bills can be traded before maturity for liquidity.
Types
- Standard Treasury Bill: Directly issued by a national government.
- Central Bank Bill: Short-term security issued by a central bank.
- Commercial Equivalent: Private short-term notes structured similarly to T-Bills.
Comparison Table
| Feature or Aspect | 90-Day Treasury Bill | Treasury Bond |
|---|---|---|
| Maturity | 90 days | 10–30 years |
| Interest Payment | Discount-based | Semi-annual coupon |
| Risk Level | Very low | Low to moderate |
| Liquidity | Very high | Moderate |
Examples
- Example 1: An investor purchases a $10,000 T-Bill for $9,900 and earns $100 at maturity.
- Example 2: A corporation parks excess cash in 90-day T-Bills to maintain liquidity.
- Example 3: Central banks use T-Bills to control short-term interest rates and money supply.
Benefits and Challenges
Benefits
- Virtually risk-free investment.
- Highly liquid and easily tradable.
- Ideal for conservative or institutional investors.
- Useful for short-term cash management.
Challenges
- Low yield compared to riskier assets.
- Returns can be eroded by inflation.
- Not suitable for long-term growth investors.
Related Concepts
- Treasury Bond: Long-term government debt instrument.
- Yield Curve: Graph showing yields across different maturities.
- Money Market Fund: Investment vehicle holding short-term debt securities.
FAQ
How are 90-Day Treasury Bills sold?
They are issued through regular government auctions and can be purchased directly or via brokers.
Are 90-Day Treasury Bills risk-free?
Yes, they are backed by the government’s full credit, making them one of the safest investments available.
How is the yield on a T-Bill calculated?
By subtracting the purchase price from the face value and annualizing the result based on 365 days.
Who invests in 90-Day Treasury Bills?
Institutional investors, corporations, and individuals seeking safety and liquidity.
Sources and Further Reading
- U.S. Treasury: https://www.treasurydirect.gov
- Federal Reserve: Open Market Operations
- Investopedia: https://www.investopedia.com/terms/1/treasurybill.asp
Quick Reference
- Face Value: The amount paid at maturity.
- Discount Rate: The difference between purchase price and face value.
- Maturity: The date the security is repaid.
