In India, a T-Bill refers to a Treasury Bill, which is a short-term debt instrument issued by the Government of India to raise funds. T-Bills are typically issued for maturities ranging from 91 days, 182 days, or 364 days. These instruments are considered to be one of the safest forms of investment in the country.
Here's an example to help explain how T-Bills work in India:
Let's say the government needs to raise funds to meet its short-term financial requirements. It decides to issue a 91-day T-Bill with a face value of ₹10,000 (Indian Rupees). The government sets a discount rate for the T-Bill, which is typically determined through an auction process.
Investors interested in purchasing the T-Bill submit their bids specifying the quantity they wish to buy and the discount rate at which they are willing to purchase the T-Bill. The discount rate is expressed as an annualized yield.
Suppose Investor A bids ₹9,900 for a T-Bill with a face value of ₹10,000, which implies a discount rate of 10%. Investor B bids ₹9,950 for the same T-Bill, implying a discount rate of 5%. Investor C bids ₹9,960 with a discount rate of 4%.
The government reviews the bids and accepts those with the lowest discount rates until the desired amount is raised. In this case, the government might accept the bids of Investor B and Investor C since they have the lowest discount rates.
Once the T-Bill is issued, it starts to accrue interest for the specified period until its maturity date. In this example, the T-Bill has a maturity of 91 days.
At maturity, the T-Bill holder can redeem the T-Bill for its face value of ₹10,000. The difference between the face value and the discounted price at which it was purchased represents the interest earned by the investor.
For example, if Investor B holds the T-Bill until maturity, they will receive ₹10,000, even though they purchased it for ₹9,950. The interest earned would be ₹50 (₹10,000 - ₹9,950).
An analogy to understand T-Bills is buying a discounted coupon for a product. Imagine you find a coupon offering a 10% discount on a product worth ₹1,000. You purchase the coupon for ₹900. After a certain period, let's say 30 days, you can redeem the coupon and purchase the product for ₹1,000, thereby earning a ₹100 discount (₹1,000 - ₹900). T-Bills work in a similar way, where investors buy them at a discount and receive the full face value at maturity, earning the difference as interest.