Treasury Bills vs Bonds: Key Differences Explained

In the world of finance, understanding the various instruments available for investment is crucial for making informed decisions. Treasury bills (T-bills) and bonds are two popular debt instruments that governments and corporations use to raise capital. Though both serve as reliable avenues for investment, they differ significantly in terms of maturity, interest rates, risk, and other characteristics. This blog will delve into the key differences between treasury bills and bonds, with a special focus on the Indian financial market.

Understanding Treasury Bills (T-Bills)

Treasury bills, commonly referred to as T-bills, are short-term government securities issued by the Reserve Bank of India (RBI) on behalf of the Indian government. These are essentially promissory notes with maturities ranging from 91 days to 364 days.

Features

1. Short-Term Maturity

T-bills have a short tenure, typically 91 days, 182 days, or 364 days. They are ideal for investors looking for a safe, short-term investment option.

2. Discounted Issue

Unlike bonds, T-bills are issued at a discount to their face value. Investors receive the face value upon maturity, with the difference between the purchase price and face value representing the interest earned.

3. No Regular Interest Payments

T-bills do not pay periodic interest. Instead, they offer a return through the difference between the issue price and the face value at maturity.

Example 

T-bills are widely used by the government to manage short-term liquidity needs. For instance, if the government needs to fund a project or meet short-term expenses, it may issue T-bills. Suppose an investor purchases a 91-day T-bill with a face value of ₹100,000 for ₹97,000. Upon maturity, the investor receives ₹100,000, earning ₹3,000 as interest.

Understanding Bonds

Bonds are long-term debt instruments issued by governments, corporations, or other entities to raise funds. They typically have a maturity period of more than one year and pay periodic interest, known as the coupon rate.

Features:

1. Long-Term Maturity

Bonds generally have a longer maturity period, often ranging from one year to 30 years or more. This makes them suitable for investors seeking stable, long-term returns.

2. Regular Interest Payments

 Bonds pay periodic interest, usually semi-annually or annually, at a fixed coupon rate. This makes them attractive to income-seeking investors.

3. Higher Yields

Due to their longer tenure and periodic interest payments, bonds generally offer higher yields compared to T-bills.

For more detailed bond strategies, explore this article on the best bond strategies to manage your portfolio

Example 

The Indian government and corporations issue various types of bonds. For instance, the Government of India issues long-term bonds, such as the 10-year Government Bond, which pays a fixed interest rate of, say, 7% annually. An investor who purchases this bond for ₹1,00,000 would receive ₹7,000 as interest each year until the bond matures, at which point they also get back their principal amount of ₹1,00,000.

Key Differences Between Treasury Bills and Bonds

Conclusion

Treasury bills and bonds are both essential tools in the investment landscape, offering different benefits depending on the investor’s goals and risk appetite. While T-bills provide a safe, short-term investment option with low returns, bonds offer higher yields with the potential for regular income, albeit with increased risk. Understanding these differences is crucial for Indian investors seeking to build a robust and diversified portfolio.

In the Indian market, where economic conditions and government policies can significantly influence financial instruments, T-bills and bonds offer a range of opportunities for both conservative and risk-tolerant investors. By carefully selecting and balancing these instruments, investors can achieve their financial goals while managing risks effectively.

Frequently Asked Questions

Q1. Are Treasury Bills or Bonds More Risky?
Ans:- Treasury bills are generally less risky than bonds due to their short maturity and lower interest rate sensitivity.

Q2. Can I Sell T-Bills Before Maturity?
Ans:- Yes, you can sell T-bills before maturity in the secondary market.

Q3. Are Treasury Bills Taxable in India?
Ans:- Treasury bills are exempt from income tax in India.