How Are Treasury Bills and Treasury Bonds Priced?
Part 11/15: A Beginner’s Guide to Investing in Treasury Bonds & Bills
Ever wondered how the price of a treasury bill or bond is determined? Unlike regular savings accounts with fixed interest, treasury securities are priced based on market forces. Here’s how it works!
How Treasury Bills Are Priced
Treasury bills (T-bills) don’t pay interest like bonds. Instead, they are sold at a discount and you get the full amount when they mature.
For example, if a 1-year T-bill is priced at UGX 900,000, it means you pay UGX 900K today and receive UGX 1 million when it matures. The difference (UGX 100K) is your profit, also called the implied interest.
The lower the price, the higher the return! If the same T-bill was sold for UGX 950K, your profit would be lower (UGX 50K), meaning a lower return.
How Treasury Bonds Are Priced
Treasury bonds (T-bonds) work differently because they pay interest (coupon payments) every six months. Their price depends on:
Market interest rates – If interest rates rise, bond prices fall (because new bonds will offer better rates). If rates drop, bond prices rise (since old bonds pay higher interest).
Time to maturity – Bonds closer to maturity tend to trade closer to their original price.
Demand and supply – If investors are rushing to buy bonds, prices go up. If many are selling, prices go down.
Example of Treasury Bond Pricing
Let’s say you bought a 10-year bond with a 15% coupon rate at face value (UGX 1 million).
If market rates drop to 12%, your bond is more valuable (because it still pays 15%), so its price rises above UGX 1M.
If rates rise to 18%, new bonds offer a better deal, so your bond is less attractive, and its price falls below UGX 1M.
Why Does Pricing Matter?
If you hold until maturity, price changes don’t matter—you’ll get your full investment back.
If you buy or sell in the OTC market, understanding pricing helps you get the best deal.
This is part of the series A Beginner’s Guide to Investing in Treasury Bills and Bonds.
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