2.1.2.4. T-Bill Quotations: Discount Yield
Because Treasury bills are issued at a discounted price and do not offer periodic interest payments, they are quoted differently from Treasury bonds. T-bills are measured in a variety of ways so that they may be calibrated with other types of securities.
Treasury bills are quoted on an annualized bank discount basis, rather than a price basis. The bank discount yield is the annualized ratio of its discount to its face value. It is calculated as follows:
Bank discount yield is not a precise measure of a bill’s return on investment: the formula is based on the face value rather than the purchase price, it assumes a 360-day year, and it only takes into account simple interest. It is a conventional formula, easy to calculate, but it tends to understate its yield.
The Treasury uses the annualized bank discount yield to compare yields on T-bills with yields on T-notes and T-bonds maturing on the same date.
Since Treasury bills mature, by definition, at their face value, they are quoted in terms of their bank discount yield. Consequently, the line in the trade papers on some future date in April may appear as below.
|
Maturity |
Days to Maturity |
Bid |
Ask |
Change |
|
May 25 ’18 |
43 |
5.59 |
5.55 |
-0.03 |
Bid and ask prices are