How To Build A Treasury Bill Ladder: A Visual Guide

So you’re interested in buying some Treasury Bills for the potentially higher returns, but aren’t exactly sure how to set it up. Well, this guide is for you! I’ve been laddering T-Bills for over a year now in order to maximize the profit out of my existing house downpayment savings and also my no fee 0% balance transfers.

Quick Facts

  1. Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.
  2. Rates are set by auction, so you will not know your exact interest rate before you commit to buy. However, if you are in a high income-tax state the chances are very good that it will be better than similar savings accounts.
  3. Auctions are held on Tuesdays, and the T-Bills both issue and mature on Thursdays.
  4. You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
  5. The transfer of money to/from your bank account upon purchase/maturity is very timely. Thus, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account will have a net positive $5 balance at the end of that day.

Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.

Since each T-Bill has an investment minimum of $1,000, you would need to commit 4 x $1,000 = $4,000. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying them every month, every two weeks, and every week:

$1,000 Minimum – Buy a T-Bill Every Month
Assuming a discount value of $995:
Week #1: T-Bill #1 will be issued on Thursday (net taken from bank account: -$995)
Week #5: T-Bill #1 will mature (+$1,000) and T-Bill #2 will be issued (-$995) on Thursday (net: -$990)
(and so on…)


In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.

$2,000 Minimum – Buy a T-Bill Every Other Week (Bi-Weekly)
[Read more…]

Interest Rate Checkup – Online, Brick and Mortar, and Treasury Bills

Here is brief roundup of the top rates for short-term cash accounts with moderate balances.

Online Savings Accounts, No Minimum Balance
HSBC Direct continues it’s 6.0% APY rate on new money until April 30th, and you can open with $1. The highest non-promo rate is from Amtrust Direct at 5.36% APY, although you must open with $1,000. Overall, rates seem to be stable as of late.

Nationwide Brick and Mortar Accounts, No Minimum Balance
Washington Mutual continues to top this area, with their WaMu 5.0% APY Saving Account. You have to open online, but after that it has all the advantages of a local branch savings account; You can transfer instantly to/from their Free Checking account, deposit directly into savings via ATMs or tellers, and take cash directly out via ATMs.

28-Day Treasury Bills Possibly Good Alternative
If you are subject to state income taxes and have cash reserves that you don’t need immediate access to, you should definitely look into Treasury Bills. Rates change weekly, with the most recent auction results showing a 5.267% investment rate. Using my 28-Day T-Bill APR-to-APY calculator with my new Tax Equivalent Yield Calculator, along with an assumed 25% federal/9% state tax bracket, that is the equivalent of a taxable interest rate of 6.12% APY. Treasury Bills are backed by the full faith of the government, and also come in 3-month and 6-month terms.

The downsides to T-Bills include the fact that you will give up some liquidity and they must be bought in $1,000 increments. For more information on how to buy them online and building a T-Bill ladder, please read the posts in my Treasury Bill category archives. Look for a new visual how-to guide coming soon.

Personally, I continue to purchase T-Bills with a portion of my cash balances as I live in Oregon with a 9% state rate. It is actually very easy to have to money transferred to and from your existing high-yield bank account. For example, if you have $30,000 sitting in a bank, you might commit $20,000 to Treasury Bills and keep the rest 100% liquid. It all depends on what you feel comfortable with.

Also see: Rate Chaser Calculator.

Tax Equivalent Yield Calculator For Savings Bonds, Treasury Bills, and Tax-Exempt Money Market Funds

There are many investments out there that are exempt from certain taxes. For example, U.S. Savings Bonds and Treasury Bonds are exempt from state and local income taxes. In addition, there are money market funds available that are exempt from federal income tax and others that are even exempt from a specific state or city’s income taxes.

Therefore, it is desirable to know what the equivalent fully-taxable rate is for one of these investments. For example, is it more profitable to earn a federal tax-exempt interest rate of 3.8% or a fully taxable 5.0%? How about a Treasury Bill paying 4.8%? Several variables affect this rate, including your marginal tax brackets for each area, as well as if you itemize your state and local taxes on your federal tax return. I could not find a calculator that accurately captured all of this, so I made my own.

Tax Equivalent Yield Calculator
(You may need to be on the individual post page for it to work.)

Enter the interest rate: %
Enter your marginal federal income tax rate: %
Enter your marginal state income tax rate (if any): %
Enter your marginal city/local income tax rate (if any): %
Federal Tax-Exempt
State Tax-Exempt
City/Local Tax-Exempt
Do you itemize deductions? Yes
Your tax-equivalent rate:   %

Let’s say you live in California, and your marginal federal tax rate is 25%, your state rate is 9.3%, and you have no local income taxes. You do not itemize your taxes. You are trying to compare the taxable Vanguard Prime Money Market Fund (VMMXX, yielding 5.08%), the federally exempt Vanguard Tax-Exempt Money Market Fund (VMSXX, yielding 3.48%), and the state and federal tax-exempt Vanguard California Tax-Exempt Money Market Fund (VCTXX, yielding 3.38%).

With that profile, the tax equivalent 7-day yields would be 4.804% for VMSXX, and 5.145% for VCTXX, making the California Tax-Exempt Fund the best bet currently for this specific situation.

How It Works (Warning: Math Ahead!)
The calculator computes the tax-equivalent rates by comparing after-tax returns. That is:

AfterTaxReturnEquivalentTaxableRate = AfterTaxReturnTaxAdvantagedRate

Using the California Tax-Exempt Fund example above:

EquivalentRate x (1 – FederalTaxes – StateTaxes) = 3.38%
EquivalentRate x (1 – 0.25 – 0.093) = 0.0338
EquivalentRate = 5.145%

So earning 3.38% free from federal and state taxes is the same as earning 5.145% in a fully taxable account.

Note that itemizing deductions means that you deduct your state income taxes from your federal taxable income. The effect is that your overall tax liability is reduced, which lowers the benefit of any tax-exemptions and thus the equivalent rates. That would change the previous equation to:

EquivalentRate x (1 – FederalTaxes – StateTaxes + (FederalTaxes x StateTaxes)) = 3.38%
EquivalentRate = 4.969%

The inclusion of this option may give different results from some of the other online calculators out there, but I believe it makes the results more complete. Another fully-worked-out example can be found here for savings bonds.

Finally, it may be handy to use this in conjunction with my Ultimate Interest Rate Chaser Calculator. Be sure to compare APRs to APRs and APYs to APYs.

Useful Resources
2007 Federal Tax Rates
State Income Tax Rates
Recent Treasury Bill Auction Results
Savings Bonds Rates

T-Bills Still Good Bank Alternative at 5.29%+ APY

For those subject to state income taxes, Treasury Bills continue to be a good alternative to online banks since their interest is exempt from state and local income taxes. For example, at their current rates my personal tax-equivalent yield is over 5.70% APY. You do lose some liquidity though, so I don’t keep every penny in there. For more information, please check out the following posts in my T-Bill category:

How To Buy A Treasury Bill Online
Taxable Equivalent Rate Calculator
Calculating and Comparing Treasury Bill Returns
28-Day Treasury Bill APY Calculator

Wonkiest New Security Feature Yet

I logged into my TreasuryDirect account today, and what do I see?


28-Day Treasury Bill APY Calculator

calc.jpgIn 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:

28-Day T-Bill Investment Rate:
Bank Interest Rate (APR) [Convert APY to APR]:

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

T-Bill interest earned: $
Bank interest earned on excess interest: $
The approximate total APY is: %


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 calculator3 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 errors2. 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-Bills5 mature in that 364 days. At the end of this theoretical1 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.

Calculating and Comparing Treasury Bill Returns

Just like when teaching class, if one person asks question, usually multiple people have the same question. Unless it’s that annoying person who always ask questions like “Do I have to put my middle name on the exam? Will you mark down for that?”

Anyways, someone asked how to calculate and compare T-Bill returns to online banks, even without adjusting for tax. I’ll base this off of the recent Treasury Bill auction results. Let’s take the most recent one:

4/27 auction results

[Read more…]

Emergency Cash In 6-Month T-Bill Ladder

Where’s my cash? Back in December, I started forming a ladder of 6-month Treasury Bills by buying $1,000 of T-Bills at the beginning of each month. Soon, I will start reinvesting the first matured T-Bill into another 6-month T-Bill, thus having $6,000 spread out in total. So far, the strategy has worked very nicely, giving me an average equivalent taxable yield of about 5.5% (for my tax situation) in exchange for a little less liquidity. Still, I have access to $1,000 each month, and if I really need to, I can always use SellDirect to sell the rest at market value with a $45 fee.

I plan on ramping up to $2,000 a month, but the rest is mainly in online savings accounts because much of it is from various 0% APR balance transfer deals, and I like to be able to pay off the entire balance whenever I want. The last bit of my cash is in some longer-term CDs and I-bonds.

Quickie: How To Buy A Treasury Bill

There seems to be some interest, so here’s a very quick example of what happens when you buy a 4-week $1,000 T-Bill.

1) Open an account at TreasuryDirect, link up checking/savings account.
2) Login, and select your amount and maturity date ($1,000)
3) You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
4) Auction occurs on Tuesday, and on Thursday the discounted amount ($99x.xx) is taken out of your account.
5) 28 days later, also on a Thursday, $1000 is put back into your account if you choose so. If there is a holiday both the purchase and maturity dates are moved together. I’ll do a better example later.

Don’t Forget About Treasury Bills To Keep Cash

People who are looking for the next best place for their cash now that ING’s Winter Sale 4.75% APY sale is over, and HSBC Direct‘s 4.80% APY promotion is soon ending, should not forget to consider Treasury Bills. You sacrifice some liquidity, but recent 28-day T-Bills have been paying 4.50-4.60% interest. Since the interest is exempt from state and local taxes, the equivalent return (calculator) can easily top 5% for those in many states. I know you can even link TreasuryDirect up with Emigrant Direct and HSBC, but I’m not sure about Capital One 360. Anyone try?

You can see my T-Bills experiences here in reverse order. Auctions for T-Bills are on Mondays and Tuesdays, so if you want in for next week you should schedule them soon.

U.S. Treasury Bills Still Attractive Cash Option

Although I messed up my Treasury Bill Ladder by switching to 6-month T-Bills, they continue to be a pretty good cash investment alternative for those people in states with high income taxes, as they are exempt from such taxes. For example, the most recent 6-month T-Bill paid a rate of 4.754%. Using my Equivalent Rate Calculator, and a federal tax rate of 25% and state tax rate of 9%, that’s the equivalent of a regular 6-month bank CD paying 5.40%. The 4-week T-bill equivalent rate is 5.07%.

For all my posts on Treasury Bills, please see here, reads bottom to top.

Equivalent Interest Rate For T-Bills / Savings Bonds Calculator

I whipped out my ancient how-to-make-a-website book, and made a simple but handy JavaScript calculator for calculating the equivalent bank CD rate for a given T-Bill or Savings Bond rate, as the interest from them are exempt from local and state taxes. This uses the rate conversion formula previously given. Remember, marginal means the tax rate at which your last earned dollar is taxed. Please try it out and let me know if something’s broken:


Enter your marginal federal income tax rate:
Enter your marginal state/local income tax rate:
Enter the T-Bill or Savings Bond interest rate:

The approximate equivalent bank rate is:

For example, at my 25% Fed and 9% State tax rates, the current 4.14% rate for a 4-week T-Bill is the equivalent of a 1-month bank CD earning 4.70% annualized.

Note: The above calculator does not assume that you will itemize deductions and deduct your state taxes from your federal taxes. Even if you do itemize, I would note that everyone gets the standard deduction, so it’s not necessarily fully deductible.

Useful Resources:
Recent T-Bill auction results
2006 Federal Tax Rates
State Income Tax Rates