{"id":1248,"date":"2021-07-20T20:23:16","date_gmt":"2021-07-20T20:23:16","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=1248"},"modified":"2023-06-19T06:14:19","modified_gmt":"2023-06-19T13:14:19","slug":"what-is-a-t-bill","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/investing\/what-is-a-t-bill","title":{"rendered":"What Are T-Bills? How Do Treasury Bills Work in Canada?"},"content":{"rendered":"\n

Treasury bills, or T-bills, are one of the lowest-risk investment products available because they\u2019re issued by the government. While the rate of return may not be very high, there\u2019s zero chance that you\u2019ll lose any money.<\/p>\n\n\n\n

That said, even guaranteed investments come with pros and cons, which is why you need to understand how T-bills work before you decide if they fit into your financial plans.<\/p>\n\n\n\n

What are T-bills in Canada?<\/h2>\n\n\n\n

When provincial and federal governments need to raise capital, they issue T-bills that the public can purchase. These debt securities are 100% guaranteed. Both your principal and interest are backed by the government, regardless of how much you invest.<\/p>\n\n\n\n

You can purchase T-bills directly from most financial institutions and investment firms. In most cases, T-bills are issued in denominations starting at $1,000. That said, some mutual funds<\/a> focus on fixed-income products, including T-bills, so it\u2019s possible to invest at a lower cost of entry.<\/p>\n\n\n\n

It\u2019s best to think of T-bills as a form of fixed income<\/a> since they\u2019re fully guaranteed. They\u2019re great for short-term investments or if you want to keep your money safe, but they provide little growth opportunity. For this reason, T-bills are often lumped together with bonds, term deposits and money market funds.<\/p>\n\n\n\n

How do T-bills in Canada work?<\/h2>\n\n\n\n

Even though you get a guaranteed rate of return when purchasing T-bills, you\u2019re not technically earning interest like you would with a guaranteed investment certificate<\/a>. The yield you get is the difference between what you bought the T-bill for and what you sell it for when it matures.<\/p>\n\n\n\n

Some new investors may be confused about how this works, but essentially, T-bills are sold at a discount. What that means is you buy T-bills at below their actual value. When you sell them back to the financial institution at the maturity date, they\u2019ll be at \u201cpar value,\u201d or their actual value. Since T-bills are worth more when you sell them, you\u2019ll have made money.<\/p>\n\n\n\n

For example, let\u2019s say you bought a T-bill for $950. After one year, it matures and is worth $1,000. When you sell it, you\u2019ll have made $50 on your investment. The capital gains made on T-bills are fully taxable if you hold them outside of a non-taxable account, such as your Tax-Free Savings Account (TFSA)<\/a>.<\/p>\n\n\n\n

How T-bill yields work<\/h2>\n\n\n\n

As mentioned, the yield of T-bills is the difference between its value at the time you bought it compared to the time you sell it. This is known as the effective yield rate. However, if you decide to sell your T-bill early, you need to calculate how much interest you\u2019ve earned while you held the T-bill. You can do this by using the following formula.<\/p>\n\n\n\n

Purchase price \u00d7 Effective yield rate \u00d7 Number of days T-bill held \u00f7 Number of days in the year sold = Interest earned as income<\/p>\n\n\n\n

Since T-bills are a form of fixed income, the overnight interest rate set by the Bank of Canada affects T-bill interest rates. Basically, when the Bank of Canada has a low prime rate, you should expect low yield rates from T-bills.<\/p>\n\n\n\n

Pros and cons of T-bills in Canada<\/h2>\n\n\n\n

T-bills can be a good investment product for your portfolio. However, they still have some pros and cons that you\u2019ll want to consider.<\/p>\n\n\n\n

Pros of T-bills<\/h3>\n\n\n\n