U.S. Treasury bills, or T-bills, are short-term investments sold at auction from the U.S. government or secondary brokers. T-bills do not offer traditional interest rates. Instead they are typically purchased for less than face value. The difference between the face value, paid at maturity, and the purchase price is the investor's profit. To compare T-bills to other investment rates, these profits are converted to an annual percentage return, which is called the T-bill's discount rate.
1. Subtract the purchase price from the T-bill's face value, which is typically $100. For example, if you purchased a 13-week T-bill for $98.12, you would have a difference of $1.88.
2. Divide this value by the T-bills face value. In the example from the previous step, you would divide $1.88 by $100 to get 0.0188.
3. Divide this figure by the number of days before the T-Bill matures. Continuing with the example, a 13-Week T-bill matures in 91 days, so you divide 0.0188 by 91 to get 0.0002065934.
4. Multiply this figure by the number of days in a year to calculate the discount rate. Although there are 365 calendar days in a year, banks typically use 360 days. In the example, multiplying by 360 gives you 0.0744, which is a discount rate of 7.44 percent.
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