Copyright 2010 by Morris Rosenthal
All Rights Reserved
Interest Calculation for Purchasing Treasury Bills Through TreasuryDirect
A couple years ago I became a big fan of buying Treasury Bills online. The T-Bills are sold direct for 26 week, 13 week, and 4 week maturities. After setting up an account with TreasuryDirect, you can either add money to your non-interest bearing Treasury Direct account for purchases, or have them pull the funds direct from your bank account. You can also set up a repeating purchase schedule, which is the only way to keep your funds continually invested. Otherwise, due to delays in the banking system, you'll lose a week of bill ownership when the money is deposited back into your account and you arrange a new purchase. Funky as that sounds, their purchase dates and credit dates just don't line up, so you are essentially buying the next bill with money you don't yet have in the account, but they don't take it until after they credit you.
You can buy Treasury bills online in any weird amount that you choose, though there is an upper limit. They don't announce an interest rate, what you do is buy the bills at a discount off the maturity value at auction, with TreasuryDirect handling all the details. So you don't find out what interest rate you'll be earning until the auction takes place and the purchase price is debited from your account. At that point, you can subtract the purchase price from the maturity value, which is the amount of the bill you are purchasing, to determine how much of a discount you purchased it at. I'm sure that sounds harder than it is, so lets do a couple examples.
Say you want to buy a $10,000 T-Bill with a four week maturity. You go to the TreasuryDirect website, choose to buy a single bill or to set up a purchasing schedule, and give $10,000 as the size of the bill you want to purchase for 4 weeks. Let's say you give your checking account as the source. A few days after the purchase date you choose (they auction each type of note just once a week), an electronic debit will appear on your checking account. For the purpose of this example, let's say it's $9969.23. That means you got a $30.77 discount off the face value of the bill, which will pay you $10,000 on maturity in four weeks, free of State taxes, I might add. That might not look like much, but let's take look at it as an annualized interest rate. There are thirteen 4 week periods in a year, so we multiply:
13 x $30.77 = $400.01
On a $10,000 investment, that would be a 4% return, and on a $9969.23 investment (if the discount rate remained steady for a year, which it won't) it would be a hair over 4%. Let's take another example. Say you bought a $25,000 T-Bill for 13 weeks, and the Treasury took $24,718.75 out of your checking account. The discount would be
$25,000 - $24,718.75 = $281.25
You own the bill for 13 weeks, or a quarter of a year, so the calculation for annualized interest on your bill would be
4 x $281.25 = $1125.00 making the interest rate
$1125 divided by $24.718.75 = 0.0455, or 4.55% simple interest.
If they were still paying that much it would be great, but the price for purchasing Treasury bills is closely related to the discount rate set by the Federal Reserve Bank, which Bernanke and the gang recently cut by a half percentage point to keep their bubble inflated. The view taken by the government is that as long as countries in the Far East and the oil rich Middle East kingdoms are willing to loan us money, it makes no difference if they are buying the United States, lock stock and barrel in the process. All of this has to do with the phony inflation rate the government computes based on how upper middle class and wealthy individuals live. Most of us can't afford to ignore food and energy prices from our personal inflation index, just because they are "volatile".
While I'm tempted to cancel my own schedule for buying T-bills over the next twelve months, I'm loathe to sell the government short. Clearly, they need the money, and better they get it from a citizen and a voter than from foreign investors. But they aren't a great investment at the moment, they don't keep up with the true inflation rate, and the state tax savings doesn't make up for it.
By the way, if you're worried about the security of buying treasury bills online, you should be. There's way too much of it! Treasury Direct changed over from typing in a password with a keyboard to using a mouse pointer to input the password on a virtual keyboard. While this must be intended to foil and malware keystroke loggers installed on your system, what it does is ensure that anybody with a view of your screen can easily read off your password. This month, the Treasury decided to go for broke and they added Bingo card security. Anytime you want to log into your account, you have to consult a plastic card for three row-and-column code letters the Treasury site generates at random. The result is that older people all over the nation who once remembered their password will now write it down and keep it with their card. Good grief! They should have just locked the funds to the original bank account, and not allowed any new accounts to be added unless they were under the same name and social security number and confirmed by calling the owner at home. But no, the Treasury doesn't believe in any direct communication off the web. When they find their T-Bill sales are falling, the interest paid won't be the only reason
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