Discount rate vs investment rate on T-bills

Drafted with AI assistance from official sources; checked against the sources listed below.

The discount rate of a Treasury bill is its discount from face value as a share of face value, on a year of three hundred and sixty days. The investment rate is what the price paid earns, on a calendar year; it is also called the bond-equivalent yield.

Why a bill has two rates

Bills pay no interest. They are sold below face value and pay face value at maturity. Bill auctions are bid in the discount rate, a convention from before computers. The investment rate restates the same price as a yield on the money actually paid, so it can be set next to a note or bond yield.

Which is higher

The investment rate is always higher. It divides by the price, which is below face value, and it counts a full calendar year. The gap grows with the rate and with the bill's length.

What to compare

• A bill against a note or bond: use the investment rate.
• A bill against earlier auctions of the same bill: either rate, as long as it is the same one each time. 500metrics names the rate in every sentence.

What it does not tell you

• What a buyer earns after tax or after selling before maturity. Both rates assume the bill is held to maturity.