How Is Interest Calculated on Legacy Direct T-Bill?

by Tim Plaehn, studioD

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.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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