How Treasury Bills Work: Price, Discount Rate and Yield
Learn how T-bills are priced at a discount, why the discount rate understates your return, and how to find the investment rate you actually earn.
Published
Free tool: T-Bill CalculatorTreasury bills (T-bills) are short-term loans to the US government, from 4 weeks to 52 weeks long. They don't pay interest the usual way: you buy them for less than their face value and receive the full face value at maturity. The difference is your interest. This guide explains how they're priced and what you really earn, using the free T-Bill Calculator.
How T-bills are priced
T-bill auction results quote a discount rate: the discount from face value, expressed as a yearly rate on a 360-day year.
Price per $100 = 100 × (1 − discount rate × days ÷ 360)
Example: a $10,000, 26-week (182-day) bill at a 4% discount rate:
- Price: about $97.98 per $100
- You pay $9,797.78 today and receive $10,000 in 182 days
- Interest earned: $202.22
Discount rate vs investment rate
The discount rate understates your return for two reasons: it's calculated on the face value rather than the smaller amount you paid, and on a 360-day year. The investment rate (bond-equivalent yield), which TreasuryDirect also publishes, fixes both:
- Discount rate: 4.00%
- Investment rate: 4.14%
- Effective annual yield if you roll it over at the same rate: 4.18%
Use the investment rate when comparing T-bills with savings accounts, CDs or bonds.
Comparing terms
At the same 4% discount rate, longer bills pay more interest and a slightly higher investment rate:
| Term | You pay | Interest | Investment rate |
|---|---|---|---|
| 4 weeks | $9,968.89 | $31.11 | 4.07% |
| 13 weeks | $9,898.89 | $101.11 | 4.10% |
| 26 weeks | $9,797.78 | $202.22 | 4.14% |
| 52 weeks | $9,595.56 | $404.44 | 4.18% |
In real auctions, rates differ by term, so compare actual results.
Why investors use T-bills
- Safety: backed by the US government.
- Taxes: interest is subject to federal income tax but exempt from state and local income tax, which helps in high-tax states.
- Flexibility: short terms, and they can be bought from $100 through TreasuryDirect or a brokerage.
The trade-off is that you lock in today's rate only until maturity, and reinvesting later may be at a lower or higher rate. For longer-term bonds with coupons, see How Bond Prices and Yields Work.
How to use the T-Bill Calculator
- Open the T-Bill Calculator.
- Choose whether to enter the discount rate or the price per $100, from an auction result or a quote.
- Enter the face value and choose the term: 4, 6, 8, 13, 17, 26 or 52 weeks.
- Tick the leap-year option if the year after purchase includes February 29.
- Read the results: the investment rate, the purchase price, the interest earned, the discount rate and the effective annual yield, with a chart of interest by term and a table of every term at this rate.
Frequently asked questions
How do I calculate the price of a T-bill?
Price per $100 = 100 × (1 − discount rate × days ÷ 360). A 26-week bill at a 4% discount rate costs about $97.98 per $100.
What is the difference between the discount rate and the investment rate?
The discount rate is based on face value and a 360-day year; the investment rate is based on the price you pay and a 365-day year, so it's higher and closer to what you earn: 4.14% versus 4.00% in the example.
Are T-bills taxed?
Yes, at the federal level, but the interest is exempt from state and local income taxes.