Updated Feb 09, 2022

What are Treasury Bills?

What are Treasury Bills?

T-bills, or quick cash market products, are known as T-bills. T bills are an effort to reduce financial deficits by the RBI on behalf of the country. It is a debt obligation with a promise of future reimbursement. In most cases, the money collected is utilised to meet short-term government needs. It is also employed to lower the country's total budget surplus.

A zero-coupon rate, i.e., no payment generated on Treasury notes or T-bills, may be purchased at a discount from their face value by private individuals. Investors receive the difference when the securities are later exchanged at an asset value. The face value of a 91-day T-bill, for example, is reduced from Rs. 100 to Rs. 95. T-bill holders get Rs.100 at maturity, netting them a profit of Rs.5 each.

Because of this, the Central Bank employs it as a vital monetary tool. Additionally, by regulating the overall money supply and generating cash, RBI can do its job more effectively.

Various types of Treasury Bills:

There are four sorts of treasury bills up for auction. These treasury bills distinguish by their holding term.

1. The 14-day bill from the Treasury

On the 14th day after the day they were issued, these bills became fully mature. After the Wednesday auction, the money disburses the following Friday. Every week, there is an auction. One lakh rupee notes are the minimum investment amount offered in multiples of one lakh rupees.

2. Treasury bill for 91 days

After 91 days from the date of issuance, the bills become fully mature. The items are put up for auction on Wednesday, and the money is collected the following Friday. Auctions are held weekly. Investing in these bills requires a minimum investment of Rs.25,000, and the bills are in multiples of Rs.25,000.

3. Treasury paper with a maturity of 182 days

After 182 days from the date of issuance, the bills become fully mature. Wednesday is the auction day, and the following Friday is the deadline for payment. Every other week, they go up for auction. Investing in these bills requires a minimum investment of Rs.25,000, and the bills are in multiples of Rs.25,000.

4. Treasury paper with a maturity date of 364 days

Three hundred sixty-four days from the date of issuance, these invoices are due. Wednesday is the auction day, and the following Friday is the deadline for payment. Auctions are held every other week. Investing in these bills requires a minimum investment of Rs.25,000, and the bills are in multiples of Rs.25,000.

According to what was said before, each bill's holding duration is fixed. On the other hand, Treasury notes' face value and discount rates might fluctuate over time. However, this depends on the amount of money the Reserve Bank of India needs to raise and the number of bids it receives. The Reserve Bank of India also issues a treasury bill calendar for auctions. Before each auction, the date, time, and amount up for grabs are all announced.

Methods of Buying Treasury Bills

There are three methods to buy treasury bills:

1. Bidding not based on merit

Non-competitive bids require the investor to consent to the discount rate set at auction. When T-bills are sold at auction, an investor gets a return close to the sum auction price. Individual investors choose this strategy because they are certain that they will get the entire bill at the end of the maturity term. Treasury Director or broker is responsible for making the payment to the investor.

2. Competitive bidding auctions

Investors purchase T-bills at a predetermined discount rate during an open tender auction. The lowest prevalence or special offer margin that a bidder/investor is prepared to take states in every bid filed. Priority is given to bids that have the lowest discount rate.'

3. A second-hand shop

The secondary market for Treasury notes allows investors to purchase or sell them. It's also possible to invest in T-bills held via mutual funds and ETFs, as well.

Treasury notes provide several advantages:

There are several benefits to investing in treasury bills, including safety and security for investors.

1. Risk-Free

Short-term government securities such as Treasury bills are quite popular. They have the support of the federal government. Since they must be paid within a certain period, they represent a financial burden on the Indian government.

2. Extremely Wet

There is a maximum maturity of 364 days for the Treasury bill. They assist the economy with meeting short-term financial needs. Short-term investors may put their money in this account. There is a secondary market for T-bills as well. Hence, this gives investors the flexibility to turn their holdings into cash at any time.

3. Bidding

Every week, the Reserve Bank of India (RBI) auctions out Treasury notes. Non-competitive offers from ordinary investors may now be placed using this method. Investors' exposure to the debt market rises, resulting in a rise in capital market cash flows.

Conclusion

The Indian government issues treasury bills, which are money market instruments. It's a kind of government-issued promissory note, and it's a mode of financing. To put it another way, the money you use to trade in T-bills, or Treasury Bills as they are more often known, is a loan to the government. The money is used to good use for the short term by the authorities. T-bills are backed by a promise that the money will be returned later.