University of Central Florida (UCF) FIN4243 Debt and Money Markets Practice Exam 1

Treasury Bills are sold at a discount from par value. This means that when investors purchase Treasury Bills, they do so for less than the amount that will be repaid at maturity. For example, an investor might buy a $1,000 Treasury Bill for $950. At maturity, the government pays back the full $1,000, so the investor makes a profit of $50.

This discount structure is a fundamental characteristic of Treasury Bills, making them distinct from other securities like Certificates of Deposit and Negotiable Certificates of Deposit, which typically pay interest either on a fixed schedule or at maturity rather than being sold at a discount. Banker's Acceptances also do not follow this approach; they are essentially a promised payment by a bank for goods and services, often traded at face value rather than at a discount.

Overall, the discount sale model for Treasury Bills reflects their role as one of the safest short-term investments and an integral part of the money market.