Treasury bills, like many short-term investments, do not pay regular interest. Rather, they are sold at a discount from face value, and return face value at maturity. The increase in value provides an implied return to investors. Since bills are sold at a discount from face value, an investor needs to know how yields are quoted, how the quoted yields compare with yields on other investments, and how to determine the discount price from the quoted yield and vice versa.
Bills may be purchased directly from the Treasury, through Federal Reserve banks in several major cities and through banks and brokerages. (See the Investor's Workshop in the August, 1988 AAII Journal for a discussion of direct purchasing of Treasury securities, including T bills.)
The simple formulas presented below will do the calculations for you. Strictly speaking, these are applicable only to bills with a maturity of six months or less. Since maturities are short, the date features of your spreadsheet are quite useful.
To generate the information you need, simply check a current Wall Street Journal, Barron's or other financial publication. Quotes are usually given as discount yields. If you enter that information into cell D4, and the maturity into cell D6, the spreadsheet will determine the discount price, and the coupon-equivalent yield. The coupon-equivalent yield is an uncompounded semiannual yield that can be compared with quoted yields to maturity for coupon bonds, such as corporate bonds.
For individuals wanting to program these formulas in BASIC or some other language or spreadsheet, the formulas are simple and are presented below.
D = Fd(t/360)
P = F - D
Y = 365d/(360 - dt)
Where: D is the dollar amount of the discount
d is discount yield. This figure is reported in the financial media
