In my previous post on Calculating and Comparing Treasury Bill Returns, it was pointed out that my APY calculation was incorrect because the way T-Bills work, you can’t actually reinvest all the interest into the next T-Bill. That is true, but what you *can* do is set your T-Bill to fund and deposit via another interest-bearing account like Capital One Consumer Bank, Emigrant Direct, or HSBC Direct. This way, you can still invest in consecutive 28-day T-Bills, and anything not rolled over to the next T-Bill is still earning decent interest.

But, we still want to compare APYs! So, what was needed was a calculator that would take all this into account. So here it is:

**28-Day T-Bill APY Calculator:**

Principal invested per $1,000 par value: **$**.

T-Bill interest earned: **$**

Bank interest earned on excess interest: **$**

**The approximate total APY is: ****%**

**Example**

Let’s do an example. Let’s take the most recent T-Bill results for a $1,000 28-day T-Bill and say you set it to reinvest every 28 days. The investment rate is 4.655%. Now, let’s say you fund via Emigrant Direct, currently at 4.50% APY. Using the APY to APR calculator^{3} and the fact that ED compounds daily, we get an APR of 4.401%.

We input these values above. It spits out that for each $1,000 T-Bill you buy, you’ll pay $996.43. Actually, you’ll pay $996.44, but that’s due to rounding errors^{2}. No big deal.

So when you buy a 28-day T-Bill, $996.44 will be taken out of your Emigrant on the next Thursday after the auction you participate in.

28 days later on another Thursday, your ED account will get a deposit of $1,000 and also a withdrawal of $996.44. $3.56 cents is left behind and earns interest at Emigrant. 28 later again, the same thing happens. Another $3.56 is left behind. This continues for a year and 13 T-Bills^{5} mature in that 364 days. At the end of this theoretical^{1} year, you’ll get approximately ($46.38 from T-Bill + $0.95 from Emigrant =) $47.33 in interest from your $996.44 initial investment. That’s an approxmiate APY of 4.75%.

It’s not perfect, but it’s something more accurate than investment rate that you can now use to compare with other online bank APYs. Note that this is pretty close to the APY that would be calculated assuming full interest reinvestment – 4.76%.

Finally, this does not take into account the tax benefits of T-Bills for those that are in states that charge state or local income taxes.

**Assumptions and Caveats**

1) The calculator assumes that the current T-Bill rate is extended out for an entire year. This cannot happen in real life as the rate is determined by auction every week. We are just extrapolating to find APY for comparison purposes. Banks change rates throughout the year as well.

2) There are plenty of round-off errors since I am allowing you to input the investment rate, which is already rounded off.

3) I again note that I am asking for the APR of the savings account you will be using, not APY. Hence, my APY to APR Calculator.

4) I am assuming that the bank interest compounds every 28 days for simplicity. Some banks compound daily, some compound monthly. It really doesn’t matter that much.

5) In actuality, there are 13.0357 (28×13= 364) T-Bills.

why is someone so young wasting their time with bonds, bills, tips, etc?

This young man is saving up a downpayment to buy a house in a year and is also borrowing money for free from credit cards, and has $50,000 in cash he is trying to maximize interest on.

Besides, the paradoxical thing is that investing for the long term is easy. Just pick your asset allocation, buy some index funds, and you’re good to go. After I bought mine I’m waiting until I have to rebalance next year.

“why”, what would you recommend instead?? Something “safe” that pays more than 5% APY?

Jon, were you able to link TreasuryDirect with HSBC? Do you know what’s the routing #?

Thanks!

Jonathan,

cool!

Why,

hey, you have to have some cash on hand, right? And unamimous advice on big purchases < 5 yrs away is don’t put it in equities. So, why settle for brick and mortar <1% interest, or even state-taxable online savings accounts when you can ladder T-bills?

The newest 28-day T-Bill auction results just got released. If you input the investment rate of 4.701%, and a bank APR of 4.401%, you’d get a 4.80% APY. Not bad.

If you have state income taxes, that’ll easily push your effective interest over 5%.

Why,

an even better reason: diversification

check out this article:

http://prudentllc.com/download/Scott04-06-06.pdf

It was pointed out that my APY calculation was incorrect because they way T-bills work, you can’t actually reinvest all the interest into the next T-bill.I disagree with that point of view (in other words, I think APY is perfectly relevant for T-Bills). I think of APY as a defined formula that calculates the theoretical yield if you compounded all interest payments. It is not your actual personal return.

1. Theoretically, it is possible to achieve the APY with T-Bills. You just need to invest a large enough chunk (about $40,000 in a 6-mo bill) so that the interest paid is $1000.

2. APY is not your actual personal return. People are confusing these two terms. The APY in a savings account is not going to be your actual personal return either. You’d have to account for fluctuating interest rates, deposits, and withdrawals. Therefore, APY for a savings account is just theoretical, just like it is for T-bills.

3. That’s a great calculator tool you created. And you will quickly realize that if you’re using a high yield savings around 4.5%, the final personal return is pretty much the same as the t-bill APY after rounding to the tenth place.

if he needs the money for a downpayment, that is fine.

if it were long term, 4.5% interest – 2 or 3% interest – taxes = 1% gain

Can the TreasuryDirect account be tracked automatically in Money Deluxe 2006 like other bank accounts? I didn’t find a way to do it unless I wanted to manually plug all the numbers in.

I live in New Hampshire http://taxadmin.org/fta/rate/ind_inc.html

and according to that “State Income Tax is Limited to Dividends and Interest Income Only.”

Are there any advantages for me to buy T-bills?

-JW

question

i have a t-note for 3 yrs at 4.375%. i am 7 months into it. i would rather cash it and get a new 3 yr note at present rates (about 5%) or consecutive short t-bills which all will have higher rates. to do this on treasury direct i must pay a fee of 45.00 and have it sold on a secondary market. this could easily mean a loss as compared to the original purchase price. i cannot figure out whether or not this would be a more profitable situation. i can’t find the bid/ask on my note at present. i also can’t find any appropriate calculators online.

how do i figure this out? say i have 10k in the 3 yr and sell on the secondary market at a loss of say 1.50 per 100, i’d be out about 200.00. would moving to a 5.055 3 yr for example make up this loss and be profitable? any ideas or suggestions would be great.

Sure, interest income on T-Bills is exactly what’s you’ll be avoiding paying interest on in New Hampshire!

Mark, your note will sell at discounted market value, which means that it will be hard to turn a profit. Keep in mind, why would someone buy your T-bill at a lower return when they could just buy the new one just like you?

I’m a bit confused. I plan on buying a 4 week(28 day) t-bill from treasury direct…The article above makes it seem as if the term is a year rather than 4 weeks. Will TD automatically…reinvest my $996… into another t-bill after the 28 days…

Not by default, but you can have it reinvest if you want. Some people are making a “ladder” that does just that.

Would this calculator work for every T-bill maturity (13 week, 26 week, etc.)? Thanks for any info!

Forgive me if I really don’t get the point of t-bills at $1,000, but if you’re earning a little more than $4 every 28 days (reaching maturity) which is about 4% return and over a year you make almost $50 off the same $1,000, why not just leave the money in a high interest savings account?

Unless you are investing $5,000 and $10,000 each time, I don’t see attractive gains in temporarily locking up $1,000.

Help me out, please!