What they Are Treasury bills (T-bills) are very safe short-term investments issued by the federal government and some provinces.
How they Work Governments issue T-bills in very large denominations of $1 million or so. Banks and investment dealers break these up and sell them to investors. You always buy a T-bill at a discount to its face value. That means you pay less than what you'll get back when the government cashes it for you. T-bills are mostly offered in terms of one month to just under one year. You might pay $975 for a T-bill and get back $1,000 when it matures one year later. Your profit is stated as a percentage of your investment, in this case it would be about 2.56% ($25 on $975). Even though your return on T-bills is a capital gain, the government treats the return as interest income, which is taxed at a higher rate.
The Risks Treasury bills are considered among the safest investments, especially when they have three months or less to maturity. Should you need your money before the T-bills mature, you can always sell them on the open market through an investment dealer.
The Rewards The returns on T-bills are generally lower than for longer term investments. However, they are ideal investments when you can't afford to risk your money. If you believe the stock market or bond market is going to slump, T-bills can be a good place to park your money for a short while. Big investors with lots of cash on hand might prefer to invest in T-bills rather than put the money in the bank. This is because bank account deposits are insured to a maximum of $100,000.