Author Topic: Somebody Explain T-Bills to me. 15% APY??  (Read 1112 times)

CrazyStudentDad

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Somebody Explain T-Bills to me. 15% APY??
« on: April 26, 2018, 07:36:54 AM »
So... I bought a T-Bill to try it out. $1k from Treasury Direct for 4 weeks. I'm trying this out because my wife and I have saved our next school-year's expenses and I'd rather not have $10k just sitting in my checking account. Moved most of it to an Ally Savings account, but thought I'd try T-Bills too.

Here's the deal....

I bought a 4-week bill, and the price ended up being $996.69 $998.69 (My dyslexia got in there again... :/). And the par amount is $1,000.00. That's a lot more discount than I expected! I read ~1-2% for T-Bills and thought that was APY. But this is 1.31% in 4 weeks!! That compounds to like 15% per year!

What am I missing? Instinctively I know I couldn't make 15%/yr off the treasury. Where has my thinking gone wrong?

EDIT: 1.31/998.69 = 0.00131 which is 0.131% not 1.31%. Count your zeros...
« Last Edit: April 26, 2018, 08:33:09 AM by marktbaldridge »

CrazyStudentDad

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Re: Somebody Explain T-Bills to me. 15% APY??
« Reply #1 on: April 26, 2018, 07:47:31 AM »
What is the CUSIP of the bond you bought?  And when was the auction?

CUSIP: 912796MB2
Auction: 4/24/2016 (although I bid on the 23rd.)

YoungInvestor

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Re: Somebody Explain T-Bills to me. 15% APY??
« Reply #2 on: April 26, 2018, 08:11:40 AM »
So... I bought a T-Bill to try it out. $1k from Treasury Direct for 4 weeks. I'm trying this out because my wife and I have saved our next school-year's expenses and I'd rather not have $10k just sitting in my checking account. Moved most of it to an Ally Savings account, but thought I'd try T-Bills too.

Here's the deal....

I bought a 4-week bill, and the price ended up being $996.69. And the par amount is $1,000.00. That's a lot more discount than I expected! I read ~1-2% for T-Bills and thought that was APY. But this is 1.31% in 4 weeks!! That compounds to like 15% per year!

What am I missing? Instinctively I know I couldn't make 15%/yr off the treasury. Where has my thinking gone wrong?

What you are describing is 0.33% in a month, but it's still north of 4% a year. Is there significant time allowed for settlement as well?

YoungInvestor

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Re: Somebody Explain T-Bills to me. 15% APY??
« Reply #3 on: April 26, 2018, 08:22:28 AM »
Two things:

(1)I think you maybe misquoted the price by $2.  Also (2) I think you are missing a decimal place in your calculation of interest.

You are earning $1.31 per $998.69 invest, not per $99.87 invested.

$1.31/998.69 = 0.13% interest over the 4 weeks.  12*0.13% = 1.57.

Treasury direct indicates this as an investment rate of 1.706% probably because they considering the compounded APR of the rate.

It's because there are 13 4-week periods in a year.

I think we have our explanation, then!

CrazyStudentDad

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Re: Somebody Explain T-Bills to me. 15% APY??
« Reply #4 on: April 26, 2018, 08:44:29 AM »
That's it guys! Between my dyslexia and forgetting my entire math career (aka watch the decimal place) I came up with 15% APY. lol

So the 4-week bills are coming to 1.7% APY. Which is not much more than Ally's savings account at 1.6% APY. So they may not be worth the trouble.

Now, I also see that the 52 week bills are 2.2% APY, and the 26 week bills are 1.9%. Those could be worth it, right?