What Is the Penalty of Cashing in T-Bills Before Maturity?

When considering where to put their money, many investors look at options through the U.S. Department of the Treasury. One choice is the Treasury Bill, also known as the T-bill. People sometimes sell or cash in their Treasury bills early to meet their financial needs. This can mean taking a loss on the investment.

A Treasury bill is a short-term debt instrument issued by the Department of the Treasury, commonly abbreviated T-bill. These so-called bills, considered among the safest investments in the world, mature in less than one year, usually at four weeks, 13 weeks, 26 weeks or 52 weeks.

Investors usually buy these bonds at less than face value. For example, you might pay $980 for a $1,000 bill. The difference between what you pay and the face value of the bill is interest. Technically there is no penalty for cashing out one of these bills early, because of the short nature of the investment.

A major difference between T-bills and other Treasury securities is that you receive no interest until the bond matures. If you sell a bond to get your money early, the value of the bond to you no longer is the difference between your payment and the bond's face value. The value becomes the difference between your payment and whatever amount you get for the bond.

Interest rates on T-bills fluctuate. If you sell your T-bill after interest rates have gone up, the resale value generally is reduced, because somebody could just buy a new bill from the Treasury to make more money. Conversely, if you sell when rates have decreased, the resale value generally increases. So depending on when you sell, you might receive less than you paid for the bond. Because you aren't keeping the T-bill until the maturity date, you also won't get the interest, although getting your principal investment back is the main concern.

It is possible to get T-bills directly from the government, at no fee. However, if you sell through a bank, broker or other dealer, the dealer might charge you a commission or transaction fee for handling your T-bills. This further decreases their value to you, though the convenience may be worth it.

In general, even though there is not a technical penalty for early cashing of T-bills because of the way T-bills are sold and how the Treasury pays interest, cashing in early may mean you don't get back all the money you invested. Because T-bills have such a short time to maturity, it's usually better to avoid the risks of selling unless it's strictly necessary for your financial well-being.