Money Tips: Advantages and Disadvantages of T-Bills

Posted On: October 23, 2005

Author: eujay
Posted: Sun Oct 23, 2005 11:36 pm
Post subject: Advantages and Disadvantages of T-Bills

Hello Again Everyone,

Do any of you know anything about T-Bills?
I got interested in them after I read about them in the Investors Bible. The book had a web page and www.treasurydirect.gov explains very celarly how the T-Bill buy/sell process works.

Question? What about taxes?
I know that T-bills are excempt from State and Fereral taxes but this seems too good to be true. Are there any taxes due on income/profit from T-bills?

Question? What’s the catch with T-bills?
If the bills are backed by the US Government then ir seems like there is virtually zero risk in buying them, keeping them till maturity and raking off a profit. So where’s the risk in T-bills?

Author: Polonius
Posted: Mon Oct 24, 2005 7:47 am
Post subject: Advantages and Disadvantages of T-Bills

Treasury bills are NOT exempt from Federal taxes–you have to pay those on the interest you earn. Yes, they’re risk-free–guaranteed by the full faith and credit of the Federal government. But they usually pay less than CDs do for the same period of time–for precisely that reason: you take more of a risk on a CD, so you get more interest.

Author: eujay
Posted: Mon Oct 24, 2005 9:14 pm
Post subject: Advantages and Disadvantages of T-Bills

Hi Polonius,
Thanks. I was really interested in yor reply…..
Quote:
you take more of a risk on a CD

Hmmm. And here I was thinking that CD’s were 100% risk free. Is this a misunderstanding? Are there any risks associated with CD’s? If there are what are the risks and how can they be calculated?

Is there any risk with T-Bills? If so what risk and how much?

After I read you rreply this morning I went to Bankrate.com and looked up some stuff on CD’s. Up until now I had been thinking CD’s were longer term, a year minimum, (this is because all the folks I knew in England in the eighties who had CD’s had them for a year or more). So when I read that the yield for a “good” Cd was in the 4 to 5 percent I figured they would be no good to me since I will be funding my investment from an equity line of credit that is at prime + 0.5, (ie; 6 to 7%).

Now what I’m now seeing is that a one month CD can have a yield of 3.75
OK now the governemnt T-bill web sites give examples of T-bills with 3.5% per month.

Sooooooo. My question is wether or not there is any risk associated with either of these two investments?

The way I figure it $1000 at 3.5% for one month gives me $35.00 and if I borrow that grand from the Equity line of Credit it will cost me $5.83 a month giving me a net gain of $29.17 for every grand I invest.

My question now is which way to go? CD’s? T-Bills? Both?
I’m thinking of investing about 10 maybe 20 thousand and I’m keen on keeping most of that liquid. Ie; I favour T-bills since I’m told they can be sold at anytime before that month ends and I would expect to at least get my money back.

Anyhoo. Thanks again for all your replies. I’ll keep you all posted. D’you think we should continue this conversation on another thread?