New issues of Treasury Bills are offered on a regular basis by governments all over the world, to fund their short term financial obligations, but not everyone knows how the income payable on them are computed. Unlike regular bonds where the rate of interest to be paid is stated on the face of the instrument, that is not the case with treasury bills. .
The bills are usually of 30 days, 90 days, 182 days and 365-days duration but may vary by a day or two in each case. The rate of interest paid on these instruments is determined by an auction system. At these auctions investors predetermine what rate of interest they want and made an offer in writing ahead of the closing time prior to the bids being opened. The lowest rates are satisfied first. If the amount offered for sale by the government is oversubscribed, then those with rates that are higher than the rates on those amounts that equate to the amount offered, are rejected.
These bills are sold at a discount below the face value that the holder receives at maturity and requires the buyers to quote their bids lower than the maturing amount. For example one may bid at a price of $97 per $100 of 91 days Treasury Bills giving a discount of 3 percent. The discount rate is the difference between the lower price paid for a security and the security’s face value, adjusted for the maturity of the issue. It is calculated as follows:
((face value-purchase price)/face value) x (365/term) x 100 = discount rate. Using this example the discount rate for an instrument of 91 days will be computed as follows: ((100-97)/100) x (365/91) x 100 = 12.03%. ((face value-purchase price)/purchase price) x (365/term) x 100 = yield. The annualized yield, or the actual rate of return per year, is calculated as follows: ((100-97)/97) x (365/91) x 100 = 12.41%.
The amount of treasury bills offered, are published by the central banks who act on behalf of the governments and may be purchased either directly by investors or through brokers. There are usually set dates each month for these issues. Information published for each tender are those relating to the dates of issue, maturity, the closing and settlement.