In government securities and money markets, what are Treasury Bills (T-bills)?

Introduction / Context:
Treasury Bills, commonly called T-bills, are among the most important money market instruments issued by governments. They are widely used by central banks, commercial banks, mutual funds and large investors as safe, short term investments and as tools for liquidity management. Understanding what Treasury Bills are is essential for anyone preparing for finance, banking or economics interviews, because they are central to how governments finance short term deficits and manage cash flows.

Given Data / Assumptions:

• The issuer is the national government or its central bank acting on its behalf.
• The instrument is classified as a money market security, not a long term bond.
• The maturity period is short, typically ranging from a few days to up to one year.
• Treasury Bills are usually sold at a discount to their face (par) value and redeemed at par on maturity.

Concept / Approach:
Treasury Bills are zero coupon securities, meaning they do not pay periodic interest in the form of coupons. Instead, investors earn a return by buying the bill at a price lower than its face value and receiving the full face value at maturity. The difference between purchase price and redemption amount represents the investor income. Because they are backed by the government, T-bills are generally considered to have very low default risk, which is why they often serve as the risk free benchmark in financial models and valuation.

Step-by-Step Solution:
Step 1: Recognise that Treasury Bills are government securities with short maturities, typically 91 days, 182 days or 364 days in many markets. Step 2: Understand that T-bills do not pay periodic interest; instead, they are issued at a price below their face value. Step 3: At maturity, the investor receives the full face value from the government, and the difference between face value and purchase price is the return. Step 4: Note that T-bills are usually highly liquid, actively traded in the money market and used as collateral in various financial transactions. Step 5: Recognise that their low risk and short maturity make them attractive for cash management, parking surplus funds and as a benchmark for risk free rates.

Verification / Alternative check:
Suppose an investor buys a 182 day Treasury Bill with a face value of Rs 100,000 at a discounted price of Rs 96,000. The government does not pay any interest during the 182 days. On maturity, the investor receives Rs 100,000. The Rs 4,000 difference is the investor earnings, reflecting the implied interest for the period. This example confirms that T-bills are short term, discount instruments rather than long term coupon paying bonds or equity securities.

Why Other Options Are Wrong:
Option B describes long term government bonds with fixed coupons, which are quite different from Treasury Bills in maturity and payment structure. Option C incorrectly treats T-bills as equity shares of public sector companies, which involve ownership and dividends, not government short term debt. Option D refers to certificates of deposit issued by banks, not by the government. Option E confuses T-bills with insurance products, which serve a different purpose. None of these match the definition of short term, discounted government securities.

Common Pitfalls:
Students sometimes confuse Treasury Bills with Treasury Bonds or with corporate commercial paper. Another mistake is to think that all government securities pay coupons, ignoring the discount structure of T-bills. In exams and interviews, always emphasise the key features: issued by government, short maturity (up to one year), zero coupon structure, issued at discount and redeemed at par. This concise description accurately captures what Treasury Bills are in finance and money markets.

Final Answer:
Treasury Bills are short term government debt instruments, usually with maturities of up to one year, issued at a discount and redeemed at face value.