Return on T-Bills Calculator

Treasury Bills (T-Bills) are short-term government securities that are issued at a discount from their face value and mature at par. Investors earn a return by purchasing T-Bills at a discount, and the difference between the purchase price and the face value (which is received at maturity) constitutes the investor's earnings. This makes understanding the return on T-Bills crucial for investors assessing the attractiveness and yield of these securities.

Historical Background

T-Bills are a reliable form of government debt, favored for their safety since they are backed by the full faith and credit of the issuing government. They play a vital role in financial markets as a benchmark for short-term interest rates.

Calculation Formula

The return on T-Bills is calculated using the formula:

\[ \text{ROTB} = \left(\frac{\text{CVTB} - \text{PPTB}}{\text{PPTB}}\right) \times 100 \]

where:

• \(\text{ROTB}\) is the Return on T-Bill (%),
• \(\text{CVTB}\) is the current value of the T-bill ($),
• \(\text{PPTB}\) is the purchase price of the T-bill ($).

Example Calculation

Suppose you purchased a T-Bill for $950, and its current value is $1,000. The return on the T-Bill would be calculated as:

\[ \text{ROTB} = \left(\frac{1000 - 950}{950}\right) \times 100 \approx 5.26\% \]

This calculation shows that the investment in the T-Bill has yielded a 5.26% return.

Importance and Usage Scenarios

The calculation of return on T-Bills is essential for investors comparing the profitability of different short-term investments. T-Bills are considered a risk-free rate of return in many financial models, serving as a benchmark for evaluating investment performance against a risk-free asset.

Common FAQs

1. What is a T-Bill?

   • A T-Bill is a short-term government security issued at a discount and maturing at face value.

2. Why do investors buy T-Bills?

   • Investors buy T-Bills for their safety, liquidity, and as a part of a diversified investment portfolio.

3. How is the return on T-Bills taxed?

   • The return on T-Bills is subject to federal income tax, but it is exempt from state and local taxes in the United States.

This calculator streamlines the process of calculating the return on T-Bills, offering investors a quick and easy way to assess their short-term investment returns.