Treasury Bills

When the U.S. government borrows money on a short-term basis (a year or less), it does so by selling what are called Treasury bills, or T-bills for short. A T-bill is a promise by the government to repay a fixed amount at some time in the future, for example, 3 months or 12 months.

Treasury bills are pure discount loans. If a T-bill promises to repay $10,000 in 12 months, and the market interest rate is 7 percent, how much will the bill sell for in the market?

Because the going rate is 7 percent, the T-bill will sell for the present value of $10,000 to be repaid in one year at 7 percent, or:

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