Difference Between Treasury Bills and Treasury Bonds:

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 Treasury Bills and Treasury Bonds are both fixed-income securities, but they have some differences in how they work.

 



Similarities:

  • Both are ways for the government to borrow money from the public.
  • Investors receive fixed interest payments over a set period of time.
Differences:

  • Structure:Treasury Bills: Issued for short periods, typically 91 days, 182 days, or 364 days, to finance short-term expenses like salaries.Treasury Bonds: Issued for longer periods, usually years, to fund various government projects.
  • Returns (Interest Rate):Treasury Bills: The longer the period (e.g., 364 days), the higher the returns.Treasury Bonds: Offer fixed interest payments every six months until maturity.
  • Minimum Investment:Treasury Bills: Require a minimum investment of Ksh.100,000. Treasury Bonds: May have different minimum investment requirements; Opening a CDS account with the Central Bank is necessary. Treasury Bills are typically issued weekly, with details available on the Central Bank Website.
  • Difference in Maturity Period:Treasury Bonds mature over 1 to 30 years, while Treasury Bills mature within a year (91 days, 182 days, or 364 days), offering short-term security.
  • Investment Comparison:Imagine you have Ksh. 100,000 to invest for one year in either Treasury Bills or Treasury Bonds, both yielding 10% annually.With a Treasury Bond, at year-end, you receive your Ksh. 100,000 principal plus Ksh. 10,000 interest.With a Treasury Bill, the interest is paid differently, using a concept called discounting.  
Discounting Concept (Illustrated with Mary’s Sweater Purchase):Mary wants to buy a Ksh.2,000 sweater but agrees to pay Ksh.1,800 upfront due to it being out of stock, receiving a Ksh.200 discount.Similarly, investing in a Ksh.100,000 Treasury Bill requires paying approximately Ksh.90,000 upfront.This Ksh.10,000 discount compensates for leaving your money invested for a year, just as Mary received a discount for waiting.
  • Face Value and Discount:The Ksh.100,000 represents the face value of the bond.The discount received depends on the term chosen; longer terms yield higher discounts.For instance, a six-month Treasury Bill may offer around Ksh.5,000 discount.
  • Investment Objective:Treasury Bills are safe, offering an alternative for short-term parking of funds rather than seeking high returns.For funds not needed for at least three months, Treasury Bills offer higher returns compared to typical savings accounts.

 

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