Question

explain why we use a completely different earnings rate measure on treasury bills compared to all other treasury maturities

Answer 1

There are four types of treasury securities: Treasury bill, treasury bonds, treasury notes and treasury inflation protection security. These securities have different aims and uses to the government.

Treasury bills are basically short term obligations of the government , which mature within one year. The U.S. government issues T-bills to fund various public projects, such as the construction of schools and highways. These bills can have maturities of just a few days or up to the maximum of 52 weeks, but common maturities are 4, 8, 13, 26, and 52 weeks. The longer the maturity date, the higher the interest rates that the T-Bill will pay to the investor. These bills are issued at discount from the face value, which implies that the purchase value is less than the face value. And at the time of maturity , these bills are paid back at the face value or par value. Thus the difference of the purchase value and face value serves as the interest f the security. Like other securities like treasury bond , they do not serve regular interest during the holding period , but pays interest at the time of maturity. So unlike all other securities ,like treasury bonds , which are held for period of more than one year and and up to 30 years , they are bought at par and serve regular interest every six months , treasury bills has no such obligations and are free from serving interest . So the method of calculation of treasury bills are different than the other securities . In treasury bills, the discount yield is the earning, the formula for which is ,

Discount yield = [( Face value – Purchase value )/Purchase value ]*(360/days till maturity)*100%.