Treasury bill (T-Bill) is a short-term debt issued by the US treasuries with a maturity of less than one year. Investing in T-Bills is a way of lending money to the government with intention of recollecting it and receiving interest rates within a year.
The money helps the government in financing the national debt. T-Bills is considered as one of the safest investment vehicles in the global financial market since your money is paid back with promised interest.
Treasury bills provide a readily available investment opportunity and are sold at a discount. Let’s take a look at the pros and cons of T-Bills.
Pros:
1. Safety and security: One of the major advantages of investing in T-bills is the safety and security provided to the investors. Although the yields may be quite low, there is a money back guarantee.** **
**2. Short-term investment: **T-bills are issued for a period of 52 weeks or less thus, no chance of being affected by inflation. Treasury bill is the safest investment since you’re guaranteed payment by the treasury.
**3. Favorable tax treatment: **Although the interest earned is subject to federal income tax, you will be exempted from state and local income tax. If you live in a state with high taxes, this helps you increase your earning from T-bills.
**4. Low transaction cost: **Buying T-bills directly from the treasury direct programs attracts free commission. Some of the nation’s largest brokers offer T-bills at zero commission. When the T-bills mature, you can turn them in and get your initial investment plus earnings at no cost or commission.
**5. No risks involved: Treasury bills are considered to be risk-free as you will definitely get the money back with the interest promised by the government no matter the president in power. **
**6. Support from US government: **T-Bills are backed by the credit of the US government. This makes you feel confident when investing in the US treasury bills.
**7. Liquid: **You can easily convert your investment into cash even before maturity. If you’re urgently in need of the cash, you can request for a refund of the money. You will not receive the full amount promised if the full-time period has not elapsed.
**8. Yield curve: Having a longer T-Bill will result in higher returns compared to short-term investments. The amount of returns is directly proportional to how long you lend the government. **
Cons:
**1. Short-term in nature: **T-bills mature very quickly and therefore you need to look for alternative means to reinvest your money after maturity. If the interests rates of the T-Bill drop, you will end up reinvesting and making less money.
**2. Federal income tax: You will have to pay federal income tax once you receive interest payment after the bond matures. **
**3. Low rates of return: **Due to the risk-free nature, treasury bills offer you low yields compared to the rate of return in other investments. The annual corporate rate of return is 5.83%.
**4. Lower interest rates: Interest rates on T-Bills are usually lower than other investment options in the market. **
**5. Broker fee: **If you buy the T-bills from the secondary market, you may have to pay broker fee or commission. Although this only applies to few broker firms, large national brokerage firms sale T-bills with zero commission.
**6. Fluctuation of prices: **T-Bill prices are influenced by factors such as monetary policy, macroeconomic conditions, and overall demand and supply of the treasuries.
7. Fall of prices: When other investments tend to be less risky and the US economy is expanding, the T-Bill prices seem to drop.