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Difficulty: MediumThe Money Market: Operations and Financial Instruments

Treasury bills are short-term money market instruments that yield returns to investors through periodic coupon interest payments prior to maturity.

Answer: Answer

Answer

The statement is False. Treasury bills do not yield periodic interest payments; instead, they are issued at a discount to face value and redeemed at par upon maturity.
Treasury bills are zero-coupon money market instruments. They do not make periodic interest payments during their tenure. Instead, they are issued at a discount to face value and redeemed at par (full face value) upon maturity, with the discount serving as the holder's earned interest.

Step-by-Step Solution

1
Analyze the features and income structure of Treasury bills as short-term government debt instruments.
Treasury bills are zero-coupon money market instruments with maturity periods typically ranging from 91 to 364 days.
Understanding the yield structure helps distinguish discounted instruments from coupon-bearing instruments.
2
Evaluate how investors earn a return on Treasury bills.
An investor buys the bill at a price below face value (at a discount) and receives the full face value upon maturity.
The difference between the discounted purchase price and the face value represents the investor's total gain.
3
Determine the validity of the statement based on whether periodic interest is paid.
Since returns are earned exclusively via the discount mechanism at maturity without intermediate interest payments, the statement is false.
Periodic interest payments are characteristic of long-term capital market instruments like government bonds, not short-term Treasury bills.

Key Concept

Treasury Bill Issuance and Yield Mechanism
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Topics

The Money Market: Operations and Financial Instruments

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