Which statement best describes how a US Treasury bill (T-bill) provides a return to the investor who holds it to maturity?
- AIt is issued at a discount to face value and pays no periodic interest, the return being the difference between purchase price and the face value paid at maturity. Correct
- BIt pays a fixed coupon every six months and returns its face value at maturity.
- CIt pays a floating rate that resets quarterly against a reference index until maturity.
- DIt pays interest monthly that is exempt from federal income tax but taxable by the state of residence.
Why A is correct: Correct: T-bills are pure discount instruments, so an investor pays less than par and receives par at maturity, and that spread is the entire yield.
Why B is wrong: This tempts candidates who blur T-bills with Treasury notes and bonds, but semi-annual coupons describe those longer instruments, not bills, which carry no coupon at all.
Why C is wrong: This mirrors a Treasury floating-rate note, so it feels current, but a standard T-bill has no periodic payment and no rate reset; the return is fixed the moment it is bought.
Why D is wrong: This inverts the true tax treatment and adds a false monthly coupon; Treasury interest is taxable federally and exempt at the state level, and bills pay no periodic interest.