Understanding Treasury Bills: Your Guide to Short-Term Investments

What is a Treasury Bill?

• A. A long-term loan to the government
• B. A bill with interest and a maturity less than one year
• C. A bill issued without interest with a maturity of less than one year
• D. A security with a variable interest rate

Answer: (C)

A Treasury Bill is a short-term government security that is sold at a discount from its face value and does not pay interest in the traditional sense. Instead, investors purchase the bill for less than its maturity value; upon maturity, the government pays the holder the full face value. The difference between the purchase price and the face value represents the interest earned on the investment. Treasury Bills have maturities that typically range from a few days up to a year, which aligns with the characteristic of having a maturity of less than one year. This makes them a popular choice for investors seeking a low-risk investment option with a short time horizon. They are backed by the full faith and credit of the U.S. government, which adds to their appeal, particularly during periods of economic uncertainty. In contrast, the other options do not accurately characterize Treasury Bills, as they either describe loans or types of securities that involve interest payments or different maturity lengths.

Treasury Bills, often referred to as T-Bills, are fascinating instruments in the world of finance, particularly for those of you preparing for the WGU BUS2040 D076 Finance Skills for Managers Practice Exam. So, what exactly are they? First, let's clarify: Treasury Bills are short-term government securities that are sold without paying interest in the traditional sense. Instead, you buy them at a discount. When they mature, you receive the face value in full. This means the difference between what you paid and the face value is effectively your earnings—sounds simple, right?