A zero-coupon Treasury bill (T-bill) is a short-term government debt security that pays no interest during its life. Instead, you buy it for less than its face value and receive the full face value when it matures. The difference between what you paid and what you get back is your return. T-bills are issued by the U.S. Treasury in terms ranging from 4 to 52 weeks, making them one of the safest and simplest short-term investments available.
How the Discount Mechanism Works
Every T-bill has a face value, sometimes called par value. The standard unit is $100. When the Treasury auctions a new bill, buyers pay something less than that face value. If you buy a 26-week T-bill for $97.50 and hold it to maturity, the government pays you $100. That $2.50 difference is your earnings. No interest checks arrive in the mail, no coupon payments hit your account. You simply get back more than you put in.
This is what makes T-bills “zero coupon.” Traditional Treasury notes and bonds pay interest every six months, which are called coupon payments. T-bills skip that entirely. Your profit is baked into the purchase price itself. The size of the discount depends on current interest rates and how long the bill has until maturity. A 52-week bill will typically sell at a steeper discount than a 4-week bill because your money is tied up longer.
Available Maturity Terms
The U.S. Treasury currently auctions bills in seven standard terms: 4, 6, 8, 13, 17, 26, and 52 weeks. Shorter terms are auctioned more frequently, while the 52-week bill is auctioned less often. Because all of these mature in under a year, T-bills sit in a distinct category from Treasury notes (which mature in 2 to 10 years) and Treasury bonds (which mature in 20 or 30 years). If you want a parking spot for cash over a few months rather than a decade-long commitment, T-bills are the instrument designed for that.
How to Buy T-Bills
You can purchase T-bills through two main channels: directly from the government via TreasuryDirect.gov, or through a bank, broker, or dealer. The minimum purchase is $100, and you can bid in $100 increments up to $10 million.
Most individual investors use what’s called a non-competitive bid. This means you agree to accept whatever discount rate the auction determines, and in return you’re guaranteed to receive the amount you requested. You don’t need to guess at pricing or compete with institutional traders. If you buy through TreasuryDirect, non-competitive bidding is your only option, and there’s a 45-day holding period before you can transfer or sell the bill.
Competitive bidding is available through brokers and dealers. In a competitive bid, you specify the exact discount rate you’re willing to accept. If the auction clears at a rate equal to or better than yours, you get some or all of what you asked for. If not, you walk away empty-handed. This approach is mostly used by institutional investors managing large portfolios.
Calculating Your Return
The return on a T-bill is straightforward in concept: you earned the difference between the price you paid and the face value you received. To express that as an annualized yield (so you can compare it to other investments), you take that profit, divide it by the price you paid, then scale it up to a full year based on how many days remained until maturity.
For example, if you pay $98 for a T-bill that matures in 182 days at $100, your profit is $2 on a $98 investment. As a percentage, that’s about 2.04% over half a year, which annualizes to roughly 4.08%. This is sometimes called the bond equivalent yield, and it’s the number you’ll see quoted in financial media and auction results. It lets you compare a 13-week bill to a 52-week bill on equal footing.
Tax Treatment
The earnings from T-bills are subject to federal income tax. The IRS treats the difference between your purchase price and the face value as interest income, reported in the year the bill matures or is sold. However, T-bill income is completely exempt from state and local income taxes. This exemption can make T-bills more attractive than comparable investments for people living in high-tax states, since a CD or money market fund paying the same rate would be taxed at both levels.
Selling Before Maturity
You don’t have to hold a T-bill until it matures. There’s an active secondary market where bills trade daily. If you need your money back early, you can sell, but the price you get depends on where interest rates have moved since you bought.
If rates have risen since your purchase, newer bills offer better returns, and your older bill is worth slightly less. If rates have fallen, your bill looks more attractive by comparison and its market price rises. For very short-term bills (4 or 8 weeks), these price swings are minimal. For a 52-week bill sold months before maturity, the effect can be more noticeable, though still modest compared to longer-term bonds.
If you hold through TreasuryDirect, selling requires an extra step: you first transfer the bill to a bank or broker, then have them sell it on your behalf. Through a brokerage account, selling is typically as simple as placing a trade.
Risks to Understand
T-bills are backed by the full faith and credit of the U.S. government, so the risk of not getting your money back is essentially zero. That doesn’t mean they’re risk-free in every sense.
The biggest practical risk is inflation. If you lock in a return of 4% on a 26-week bill and inflation runs at 5% over that period, your purchasing power actually decreased. You got your dollars back, plus profit, but those dollars buy less than they did six months ago. Research from the National Bureau of Economic Research has shown that unexpected inflation in one period tends to push expected inflation higher in subsequent periods, compounding this concern for investors who keep rolling short-term bills.
Interest rate risk is the other consideration, though it cuts both ways. If you buy a 52-week bill and rates jump three months later, you’re stuck earning less than you could have. You can sell and reinvest, but you’d take a small loss on the sale. Shorter-term bills reduce this risk because your money frees up more frequently, letting you reinvest at current rates.
How T-Bills Compare to Notes and Bonds
The key differences come down to maturity, income structure, and price sensitivity. T-bills mature in a year or less and pay no periodic interest. Treasury notes mature in 2 to 10 years and pay interest every six months. Treasury bonds stretch out to 20 or 30 years, also paying semiannual interest.
Because T-bills are so short-lived, their prices barely move in response to interest rate changes. A 30-year bond, by contrast, can swing significantly when rates shift. This makes T-bills a natural choice for preserving capital over short periods, while notes and bonds are better suited for locking in income over years or decades. The tradeoff is that T-bills typically offer lower overall returns, since you’re taking on less risk and committing your money for less time.
For most individual investors, T-bills function like a higher-yielding alternative to a savings account or money market fund. You’re giving up instant access to your cash (your money is locked up for at least a few weeks), but you’re earning a competitive, government-guaranteed return with a favorable tax treatment that savings accounts can’t match.