SOPHIASPRING2016FIXE - Knowledge Treasury_bill

Treasury bill (T-bill)
=In the modern world, the archetypal example of “cash” is a short-term US
Treasury bill (or T-bill). These securities, issued and guaranteed by the US
government, are zero-coupon bonds since they pay no coupons and only
provide payment of principal at maturity. Like Treasury notes and Treasury
bonds, they are sold at auction in denominations between $10,000 and
$1,000,000.
If you buy a T-bill with 50 days to its quoted maturity, you will receive a bullet
payment of $100,000 in 52 days. If the current price is $98,000, the annualized
interest return is (100000/98000)^(365/52) = 1.15. Of all institutions in the
world, perhaps the US government is currently the least likely to default on its
obligations. Thus, the return on T-bills is often used by economists to proxy for
the riskless return.
T-bill prices are quoted as “discount rates.” They are quoted with a nominal face
value of $100 using an actual/360 day count convention. If B is the price of a Tbill and n is the number of days to maturity, the current quote is then:
(100 - B)  (360/n)
For example, for a 90-day $100,000 T-bill with a current price of $98,000, the
newspaper quote is:
(100 - 98)  (360/90) = 8.00
Although this calculation is an approximation to an annualized interest rate, it is
not the percentage annualized yield-to-maturity of the T-bill. This is instead:

(100/98)^(365/90) - 1 = 8.53%