Treasury bills also simply known as T-bills, are sold to be paid back in a few days’ time but to a maximum of fifty two weeks. T-bills are usually sold at a discounted rate from the par amount similarly known as the face value. For example, a company might be charged $1980 for a $2,000 Treasury bill. The difference that exists between the price of purchasing the bill and its face value is the interest. It is also likely for an auctioning of a bill to result in prices that are equal to the par amount which implies that the T-bill will issue as well as redeem the issued securities at the price of the par value.
It is best for a company to invest in treasury bills because of the following advantages that come with them. First, it is secure to invest in T-bills. T-bills are among the safest investments avenues for a company. 52 weeks is a short period and in case of inflation in the market, their value cannot be significantly eroded. Secondly, T-bills have a low costs of transaction. If the company purchases the T-bills directly from the treasury, it does not pay for any commission. Once they are mature, they are returned back and the company gets back its initial investment as well as its returns back without paying for any commissions or fees.
The main difference that exists between a repurchase agreement and commercial paper is that a repurchase agreement must be evidenced by use of written contract, whereas the commercial paper is not necessarily documented. The documented repurchase agreements are more robust legally than commercial papers that are not documented. This determines how a merger will be performed in documented commercial papers compared with its equivalent procedure in repurchase agreement and what will happen in case dividend or a coupon is paid using collateral, in a repurchase agreement when compared to undocumented or documented commercial papers. Repurchases are accompanied with less levels of risks.
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