This article discusses
buy treasury bills - government treasury bills
interest rates.
People buying Treasury bills (T-bills) through their banks or brokerage
houses pay a fee of $30 or more. It's possible to bypass the fee,
however, and place the order yourself by submitting what's known as a
noncompetitive tender. That means you are willing to pay the prevailing
price set at the weekly government auction of T-bills every Monday.
To understand the bidding process, you need to know how T-bills are
priced. That is, they are sold at less than face value, and at maturity
they are redeemed at full face value. So while interest is being earned,
there is no interest payment as such.
The interest rate earned by the purchaser usually is expressed in terms
of the commonly used discount rate. This rate is based on the face value
of the bill. It understates the investor's real return.
See
treasury bills
for more information.
To make a valid comparison with coupon bearing
securities, such as corporate bonds, investors need to know the coupon
equivalent yield of the bill. This is the yield on the amount they
actually invest.
Interest from T-bills, unlike the interest on bank savings certificates
pegged to them, is exempt from state and local income taxes.
Investors who wish to bid on T-bills should submit
their bids to one of the 12 regional Federal Reserve Banks around the
country. The Banks have similar but not identical operating policies.
Those described below apply to the Federal Reserve Bank of New York, so
check with the Bank in your area to see if there are any differences.
To be on the safe side, investors should mail their bids early enough to
arrive at least one business day before the Monday auction. But people
submitting bids in person can do so up until 1:30 p.m. on the day of the
auction. The Wall Street office of the New York Fed-which serves
residents of New York State, Connecticut's Fairfield County, and the 12
northern counties of New Jersey-is open for business between 9 a.m. and
3 p.m.
You must either fill out a tender form (provided by
the fed) or send a letter that indicates, among other things, whether
you wish to reinvest your money when the T-bill matures.
Even though T-bills are sold at discount, you must pay the full $10,000
face value of the bill at the time you submit your bid. You may pay in
cash, with a personal certified check, or with an official bank check
drawn on a bank in the New York Federal Reserve District.
To
Buy Treasury Bills - Government
Treasury Bills Interest Rates - Top
Any check must be made out payable to the "Federal
Reserve Bank of New York." A check from a third party, payable to you
and then endorsed by you over to the Bank, will not be accepted. Nor
will a check drawn on a money market mutual fund.
A few days after the auction, the New York Fed will mail you a discount
check, representing the difference between the purchase price and the
face value of the bill.
What you will receive: An ordinary receipt that links up to a book entry
in a government ledger, attesting to ownership of aT-bill.
Treasury Bills As Leverage In Stock Trading
Margin-account investors can take a beating in a volatile market when
interest rates are high. A better strategy: Invest in Treasury bills
(T-bills) or bonds. Then borrow against the bills (brokerage firms will
lend up to 90 cents on the dollar of face value) for money to trade in
the stock market.
Several advantages:
• Assured income on the T-bill, no matter what happens to the stocks.
Thus, a hedge.
• T-bill income is not taxable on state and local returns.
• T-bills offer instant liquidity.
• No margin calls. Timing of trades is totally your own decision.
• Like a passbook loan, it makes credit easier to get as money becomes
tighter.
Think in terms of buying and selling securities on a
short-term price basis. Use the guaranteed income from the T-bill to
neutralize the effects of market volatility.
If you elect to hold a stock, the numbers begin to go against you if
interest rates continue to climb during the holding period. This is
because interest on the T-bill is fixed. To avoid this danger, establish
an annual rate-of return goal for every invested dollar. Whenever that
goal is reached, take the profit. This gives you the option of sitting
out the rest of the year if you don't like market conditions.
Bookkeeping bonus: Collateralizing a margin account with T-bills is not
only the best but also the most convenient and economical way of taking
advantage of high interest rates and, at the same time, keeping trading
money available. Accounting is easy, since the account is debited with
interest on a running basis. You see your margin charge every month and
know what you can expect in interest at the end of every holding period.
Source:
Consumer Information Center
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