# How Is Interest Calculated on Legacy Direct T-Bill?

by Tim Plaehn

A Legacy Direct account is established with the U.S. Treasury for the purchase of Treasury bills by an investor. This type of account allows an investor to buy 13- and 26-week Treasury bills without any charge or commission. The pricing and yield on T-bills purchased in a Legacy Direct account work in the same manner as T-bills bought through any other investment channel.

## Treasury Bill Pricing

Treasury bills are sold at a discount to the face value. The interest to be earned is the difference between the purchase price and the face value to be paid into your Legacy Direct account when a bill matures. For example, a \$100,000 T-bill might cost \$99,900 when issued. The \$100 difference is the interest earned when the bill matures. The Treasury bills available for purchase in a Legacy Direct account are shorter-term 13- and 26-week bills, so the amount of interest earned on an individual T-bill may be quite small. Treasury bill price quotes are listed as a percentage of the final value. The example bill would quote at a price of 99.9.

## T-Bill Yields

The quoted yield on a Treasury bill is the discount rate from the face value. Because Legacy Direct accounts are limited to 13-and 26-week T-bills, the amount of price discount will be less than the discount rate. Using a 4 percent rate, a 26-week bill will be priced at about 98, a discount of 2 percent for 6 months. A 13-week bill will be priced at about 99, a 1 percent discount for the 3 months until the bill matures.

## Return vs. Yield

The discount yield on a Treasury bill understates the return an investor will earn on a bill. Since bills are sold at a discount, the return is calculated from the discounted price. In the 26-week example from above, a price of 98 is a 2 percent discount, which provides an investment return of 2.041 percent. The annualized return on the 26-week T-bill would be 4.082 percent, slightly above the 4 percent discount rate.

## Low Rate Environment

At the time of publication, the interest rates on short-term Treasury bills were very low and had been below 0.25 percent for several years. At these low rates, the amount of interest earned on a short-term T-bill purchased in a Legacy Direct account would be quite small. The most recent T-bill auctions had a 13-week, \$100,000 T-bill earning less than \$3.00 to maturity, and a 26-week bill would earn about \$7.50. These bills provided yields of 0.11 to 0.15 percent annualized.