Bond
Learn what a bond is
In the United Kingdom, the Debt Management Office (DMO) issues UK Treasury bills through a weekly tender process. Treasury bills are used to raise cash to finance the Government’s day-to-day operational needs.
They are zero coupon bonds that have a maturity of less than one year. They can have a maturity as short as one day. However, in most weekly tenders the DMO offers a mix of 1-month, 3-month, and 6-month Treasury bills.
UK Treasury bills are unconditional obligations made by the UK Government with recourse to the National Loans Fund and the Consolidated Fund. This means that the UK Government stands behind Treasury bills and promises to repay them.
The National Loans Fund is like the Government’s lending account at the Bank of England, while the Consolidated fund is more like the Government’s current account.
UK Treasury bills were first introduced in 1877 and, since then, the UK Government has never defaulted on these securities.
Unlike longer-term UK government debt, such as gilts, which usually pay a coupon (interest) and have a maturity date of 1 year or more, UK Treasury bills are issued at a discount to their maturity value and do not pay a coupon.
When you buy a UK Treasury bill, you purchase it at less than its maturity value (at a discount) and you receive back its maturity value when it matures. The maturity value is sometimes called the par value or nominal value.
For example, a 28-day UK Treasury bill with a maturity value of £1,000 and a 5% annualised yield, will have a purchase price of £996.16. The difference between the maturity value and purchase price is the yield of £3.84 a customer will earn over the 28 day period. These calculations do not take into account any fees.
UK Treasury bills are also called “zero-coupon” instruments.
