Treasury Direct Question

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spdoublebass
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Treasury Direct Question

Post by spdoublebass » Tue Jun 19, 2018 11:30 am

When placing a non competitive bid for an upcoming auction, which price to get get? The one labeled Investment rate or the High rate?

From what I’ve read on the site you receive the High Rate...but I wanted to double check.

This is pertaining to treasury Bills, but I think for notes it’s called something different then High Rate.

Thank you.
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welderwannabe
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Re: Treasury Direct Question

Post by welderwannabe » Tue Jun 19, 2018 11:33 am

You get the high rate.

The difference between the high rate and the investment rate is how it is annualized. I don't recall exactly, but if I remember it has to do with how many days it is annualized over.

The blurb from Treasury Direct is below
Discount rate. An annualized rate of return based on the par value of
the bill. The discount rate is calculated on the actual number of days to
maturity by using a 360-day basis (figuring 12 months with 30 days each).
You can’t use the discount rate to compare the rate of return on a bill with
other instruments.
Investment rate (equivalent coupon yield). An annualized rate based
on the bill’s purchase price. The investment rate is based on the purchase
price and calculated on a 365-day basis (or 366-day basis during leap
year). You can use the investment rate to compare bill yields with other
instruments.
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spdoublebass
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Re: Treasury Direct Question

Post by spdoublebass » Tue Jun 19, 2018 2:40 pm

welderwannabe wrote:
Tue Jun 19, 2018 11:33 am
You get the high rate.

The difference between the high rate and the investment rate is how it is annualized. I don't recall exactly, but if I remember it has to do with how many days it is annualized over.

The blurb from Treasury Direct is below
Discount rate. An annualized rate of return based on the par value of
the bill. The discount rate is calculated on the actual number of days to
maturity by using a 360-day basis (figuring 12 months with 30 days each).
You can’t use the discount rate to compare the rate of return on a bill with
other instruments.
Investment rate (equivalent coupon yield). An annualized rate based
on the bill’s purchase price. The investment rate is based on the purchase
price and calculated on a 365-day basis (or 366-day basis during leap
year). You can use the investment rate to compare bill yields with other
instruments.

Thank you!
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Phineas J. Whoopee
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Re: Treasury Direct Question

Post by Phineas J. Whoopee » Tue Jun 19, 2018 3:47 pm

You, and the successful competitive bidders and all the noncompetitive bidders, get the highest rate accepted at the auction.

The way it works is the Fed, which is not lending or borrowing money, just conducting an auction as one of the banking services it offers to the federal government, arranges the auction.

The Treasury decides it will borrow some amount of money, call it twenty billion dollars for example, using for example two-year notes. The Fed, which merely conducts the auction, announces it and solicits sealed bids. Nobody can see anybody else's bid.

The bids are in the form, for example, of I will take two billion if I can get at least 1.5%.

Shortly after the bidding deadline the Fed, metaphorically in our digital age, opens all the bids, and lays them out on the table arranged from lowest to highest interest rate requested.

First they accept all the noncompetitive bids, then the competitive ones from low yield to high until the entire issue is filled. Everybody who's successful gets the rate from the highest accepted bid, and those who asked for more yield get none of the issue at all.

You, as a noncompetitive bidder, get the highest accepted rate.

PJW
Last edited by Phineas J. Whoopee on Tue Jun 19, 2018 4:11 pm, edited 1 time in total.

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spdoublebass
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Re: Treasury Direct Question

Post by spdoublebass » Tue Jun 19, 2018 4:00 pm

Phineas J. Whoopee wrote:
Tue Jun 19, 2018 3:47 pm
You, and the successful competitive bidders and all the noncompetitive bidders, get the highest rate accepted at the auction.

The way it works is the Fed, which is not lending or borrowing money, just conducting an auction as one of the banking services it offers to the federal government, arranges the auction.

The Treasury decides it will borrow some amount of money, call it 20 billion dollars for example, using for example two-year notes. The Fed, which merely conducts the auction, announces it and solicits sealed bids. Nobody can see anybody else's bid.

The bids are in the form, for example, of I will take 5 billion if I can get at least 1.5%.

Shortly after the bidding deadline the Fed, metaphorically in our digital age, opens all the bids, and lays them out on the table arranged from lowest to highest interest rate requested.

First they accept all the noncompetitive bids, then the competitive ones from low to high until the entire issue is filled. Everybody gets the rate from the highest accepted bid, and those who asked for more get none of the issue at all.

You, as a noncompetitive bidder, get the highest accepted rate.

PJW

This is great thank you.

I do have one follow up question.

Full discloser, I bought one 4 -week Tbill for $100, just to see how this all works.

The auction was today and I now see this information:


Maturity Date = 07/19/2018
High Rate = 1.815%
Investment Rate = 1.843%
Price Per $100 = 99.858833



So I understand since this is a one month bond, that I would take the High Rate and divide that by 12 to get the one month rate. But am I getting (1.815%/12) interest on $100 or $99.85?
My end result should equal $100.15125 correct?

Did the bond sell at a discount? or is this the way it works. I have read the wiki, but it's still different in real life to understand. That's why I started with one 4 week $100 bond.

Thanks again for your time. Most helpful.
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Phineas J. Whoopee
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Re: Treasury Direct Question

Post by Phineas J. Whoopee » Tue Jun 19, 2018 4:18 pm

The practice is Treasury security coupons are in multiples of 0.125% (that has a mildly interesting history which doesn't pertain to your question).

If necessary, which it usually is, to fine tune the yield the securities are issued at a small premium or a small discount.

Yield, which if not otherwise specified conventionally means Yield to Maturity, YTM, works out the same.

PJW

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Phineas J. Whoopee
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Re: Treasury Direct Question

Post by Phineas J. Whoopee » Tue Jun 19, 2018 4:33 pm

I think I should add Treasury Bills, T-bills, those with a maturity of less than a year, like the one you bought, have no coupons. They're sold at a discount, with YTM working out the same, and at maturity yield just as if they had coupons.
PJW

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Re: Treasury Direct Question

Post by FactualFran » Tue Jun 19, 2018 4:49 pm

spdoublebass wrote:
Tue Jun 19, 2018 4:00 pm
Full discloser, I bought one 4 -week Tbill for $100, just to see how this all works.

The auction was today and I now see this information:


Maturity Date = 07/19/2018
High Rate = 1.815%
Investment Rate = 1.843%
Price Per $100 = 99.858833



So I understand since this is a one month bond, that I would take the High Rate and divide that by 12 to get the one month rate. But am I getting (1.815%/12) interest on $100 or $99.85?
My end result should equal $100.15125 correct?

Did the bond sell at a discount? or is this the way it works. I have read the wiki, but it's still different in real life to understand. That's why I started with one 4 week $100 bond.
Dividing the annual rate by 12 gives an average monthly rate. However, the term of the T-Bill is 4 weeks, not an average month, which has a fraction more than 4 weeks.

For T-Bills, it may be a good idea to initially ignore the rate and concentrate on the price. You will pay $99.86 for $100 of that T-Bill purchased at auction. You will receive $100 with it matures.

In other words, T-Bills are sold at a discount. The dollar amount of the discount when purchased at auction corresponds to the High Rate of the auction. The Investment Rate of the auction corresponds to the difference between the maturity value ($100 in this case) and the purchase price ($99.86 in this case).

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spdoublebass
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Re: Treasury Direct Question

Post by spdoublebass » Tue Jun 19, 2018 5:13 pm

FactualFran wrote:
Tue Jun 19, 2018 4:49 pm

Dividing the annual rate by 12 gives an average monthly rate. However, the term of the T-Bill is 4 weeks, not an average month, which has a fraction more than 4 weeks.

For T-Bills, it may be a good idea to initially ignore the rate and concentrate on the price. You will pay $99.86 for $100 of that T-Bill purchased at auction. You will receive $100 with it matures.

In other words, T-Bills are sold at a discount. The dollar amount of the discount when purchased at auction corresponds to the High Rate of the auction. The Investment Rate of the auction corresponds to the difference between the maturity value ($100 in this case) and the purchase price ($99.86 in this case).
Phineas J. Whoopee wrote:
Tue Jun 19, 2018 4:33 pm
I think I should add Treasury Bills, T-bills, those with a maturity of less than a year, like the one you bought, have no coupons. They're sold at a discount, with YTM working out the same, and at maturity yield just as if they had coupons.
PJW

Thank you both for the explanation. It was really clear and helpful.
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Re: Treasury Direct Question

Post by Angst » Wed Jun 20, 2018 5:31 am

For my needs, I'd never buy anything but US Savings Bonds at Treasury Direct. As far as treasuries go, I get the same price at Vanguard (and one can elsewhere) but have the flexibility of already holding my treasuries at Vanguard where I have the bulk of all my other investments. It's so much easier from my perspective. I'd gain nothing by going through Treasury Direct.

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Re: Treasury Direct Question

Post by MikeG62 » Wed Jun 20, 2018 7:12 am

Angst wrote:
Wed Jun 20, 2018 5:31 am
For my needs, I'd never buy anything but US Savings Bonds at Treasury Direct. As far as treasuries go, I get the same price at Vanguard (and one can elsewhere) but have the flexibility of already holding my treasuries at Vanguard where I have the bulk of all my other investments. It's so much easier from my perspective. I'd gain nothing by going through Treasury Direct.
Agnst,

Assume you are buying new Treasury issues. When doing so (at Vanguard) do you ever find that your entire order is not filled? In other words, if you put in a bid for say 25 bonds, have you always gotten the full 25 bonds or just a portion of the bid?

I plan to embark on a strategy of buying 6-month Treasuries (through Fidelity) and I am curious how the auctions work in this regard.
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Re: Treasury Direct Question

Post by spdoublebass » Wed Jun 20, 2018 9:36 am

Angst wrote:
Wed Jun 20, 2018 5:31 am
For my needs, I'd never buy anything but US Savings Bonds at Treasury Direct. As far as treasuries go, I get the same price at Vanguard (and one can elsewhere) but have the flexibility of already holding my treasuries at Vanguard where I have the bulk of all my other investments. It's so much easier from my perspective. I'd gain nothing by going through Treasury Direct.
I know what you mean. I have other reasons for wanting to go with TD.

I have a specific thing I am saving for. By planning ahead it will make it very simple. However, I want to be able to purchase things smaller than $1000.

For short term, my credit union has a one year add on CD for 1.75% that I am ok with parking the money there for a while. I really just wanted to understand how TD works.
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#Cruncher
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Re: Treasury Direct Question

Post by #Cruncher » Wed Jun 20, 2018 10:36 am

Phineas J. Whoopee wrote:
Tue Jun 19, 2018 3:47 pm
The way it works is ...
Nicely written explanation of how a Treasury auction works, PJW!

spdoublebass wrote:
Tue Jun 19, 2018 4:00 pm
The auction was today and I now see this information:
Maturity Date = 07/19/2018
High Rate = 1.815%
Investment Rate = 1.843%
Price Per $100 = 99.858833
(These figures appear on the 28-day bill auction results PDF file.) The "Price" and "Investment Rate" are determined using the formulas on this TreasuryDirect PDF File.

Code: Select all

          price = 100 * (1 - maturity days * high yield / 360)
      99.858833 = 100 * (1 - 28            * 0.01815    / 360)
     
Investment rate = ((100 - price)     / price)     * (days in year / maturity days)
        0.01843 = ((100 - 99.858833) / 99.858833) * (365          / 28)
The "Investment Rate" is comparable to the yield on Treasury notes and bonds that pay semi-annual coupon interest. This is easiest to see for a 26-week bill, for example the one auctioned 6/18/2018 which had a "Price" of 98.950972 and an "investment Rate" of 2.126%. Imagine a hypothetical Treasury note selling at par with a 2.126% coupon and exactly 6 months until maturity. The buyer would pay $1,000 today and get $1,010.63 (principal plus 1/2 a coupon). Today's price is 98.95% of the proceeds at maturity (1000/1010.63), the same (to 4 significant digits) as the price of the 26-week T Bill.

Getting back to the 28-day bill you bought, spdoublebass: With a price of 99.858833, your Annual Percentage Yield [1] is
1.86% = (100 / 99.858833) ^ (365 / 28) - 1

MikeG62 wrote:
Wed Jun 20, 2018 7:12 am
… if you put in a bid for say 25 bonds, have you always gotten the full 25 bonds or just a portion of the bid?
You'd never get just a portion because your order of 25 would be a "non-competitive" bid [2] and, as PJW says in his excellent post above,
First they accept all the noncompetitive bids, then the competitive ones from low yield to high until the entire issue is filled. (underline added)
  1. Annual Percentage Yield (APY) is how banks quote interest on savings accounts and CDs. Be aware that, unlike Treasury securities, interest on savings accounts and CDs is subject to state income tax.
  2. In a typical auction non-competitive bids are swamped by the competitive bids. For example the recent 26-week auction had non-competitive bids for $680 million compard to competitive bids for $116 billion -- of which $41 billion were accepted.

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Re: Treasury Direct Question

Post by MikeG62 » Wed Jun 20, 2018 12:20 pm

#Cruncher wrote:
Wed Jun 20, 2018 10:36 am
MikeG62 wrote:
Wed Jun 20, 2018 7:12 am
… if you put in a bid for say 25 bonds, have you always gotten the full 25 bonds or just a portion of the bid?
You'd never get just a portion because your order of 25 would be a "non-competitive" bid [2] and, as PJW says in his excellent post above,
First they accept all the noncompetitive bids, then the competitive ones from low yield to high until the entire issue is filled. (underline added)
  1. Annual Percentage Yield (APY) is how banks quote interest on savings accounts and CDs. Be aware that, unlike Treasury securities, interest on savings accounts and CDs is subject to state income tax.
  2. In a typical auction non-competitive bids are swamped by the competitive bids. For example the recent 26-week auction had non-competitive bids for $680 million compard to competitive bids for $116 billion -- of which $41 billion were accepted.
Ok, got it. Makes sense now. Thanks.
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spdoublebass
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Re: Treasury Direct Question

Post by spdoublebass » Wed Jun 20, 2018 11:26 pm

#Cruncher wrote:
Wed Jun 20, 2018 10:36 am
spdoublebass wrote:
Tue Jun 19, 2018 4:00 pm
The auction was today and I now see this information:
Maturity Date = 07/19/2018
High Rate = 1.815%
Investment Rate = 1.843%
Price Per $100 = 99.858833
(These figures appear on the 28-day bill auction results PDF file.) The "Price" and "Investment Rate" are determined using the formulas on this TreasuryDirect PDF File.

Code: Select all

          price = 100 * (1 - maturity days * high yield / 360)
      99.858833 = 100 * (1 - 28            * 0.01815    / 360)
     
Investment rate = ((100 - price)     / price)     * (days in year / maturity days)
        0.01843 = ((100 - 99.858833) / 99.858833) * (365          / 28)
The "Investment Rate" is comparable to the yield on Treasury notes and bonds that pay semi-annual coupon interest. This is easiest to see for a 26-week bill, for example the one auctioned 6/18/2018 which had a "Price" of 98.950972 and an "investment Rate" of 2.126%. Imagine a hypothetical Treasury note selling at par with a 2.126% coupon and exactly 6 months until maturity. The buyer would pay $1,000 today and get $1,010.63 (principal plus 1/2 a coupon). Today's price is 98.95% of the proceeds at maturity (1000/1010.63), the same (to 4 significant digits) as the price of the 26-week T Bill.

Getting back to the 28-day bill you bought, spdoublebass: With a price of 99.858833, your Annual Percentage Yield [1] is
1.86% = (100 / 99.858833) ^ (365 / 28) - 1
Cruncher....thank you very much for taking the time to write that out for me. It's super clear now.
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Re: Treasury Direct Question

Post by Filife20Forty » Thu Jun 21, 2018 9:47 am

I don't think this has been covered specifically, but mentioned in a few responses.

Can someone explain the tax reporting for T-bills bought from Treasury Direct? Do you have to log (I use Turbotax) each individual T-bill that is bought? Does a re-enrollment constitute a separate T-bill from the first T-bill purchased? Trying to wrap my arms around the burden of tax reporting for the individual T-bills bought through TD vs. buying them through Vanguard or another broker.

Thanks!

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Re: Treasury Direct Question

Post by FactualFran » Thu Jun 21, 2018 2:11 pm

Filife20Forty wrote:
Thu Jun 21, 2018 9:47 am
Can someone explain the tax reporting for T-bills bought from Treasury Direct? Do you have to log (I use Turbotax) each individual T-bill that is bought? Does a re-enrollment constitute a separate T-bill from the first T-bill purchased? Trying to wrap my arms around the burden of tax reporting for the individual T-bills bought through TD vs. buying them through Vanguard or another broker.
I don't know what you mean by "log each individual T-bill that is bought". When filling in a federal income tax return, if you have more than $1,500 of taxable interest, then you report the sum of the interest from a single brokerage account on a single line in Schedule B. If you have at most $1,500 of taxable interest, then you put the sum of the taxable interest on Form 1040 (or variant), without completing Schedule B.

I don't know what you mean by "re-enrollment". If you use the proceeds of a maturing Treasury security to buy a new one, the two are separate securities.

A difference between Treasury Direct and a brokerage is Treasury Direct does not mail 1099-INT forms, you have to login to your Treasury Direct account to get the amount of taxable interest to report on you income tax return. Brokerages mail 1099-INT forms, but are not required to if less than $10 of interest is being reported.

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Re: Treasury Direct Question

Post by Filife20Forty » Thu Jun 21, 2018 2:38 pm

Thanks. This is (FY18) the first year I have purchased T-bills, which is why I had the tax filing question.

I'm currently buying T-bills through Treasury Direct website rather than buying treasuries through a brokerage. Based on reading through the responses on this question, it seemed as though the tax reporting for T-bills purchased through Treasury Direct was much more onerous than just receiving a form from a brokerage, whereby I would need to manually type in each T-bill I have purchased in order to report the interest earned. I guess the short version of the question is, can I print a summary of all T-bills purchased and interest earned for a calendar year for tax reporting purposes?

Thanks in advance!

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Re: Treasury Direct Question

Post by MikeG62 » Thu Jun 21, 2018 2:47 pm

Filife20Forty wrote:
Thu Jun 21, 2018 2:38 pm
Thanks. This is (FY18) the first year I have purchased T-bills, which is why I had the tax filing question.

I'm currently buying T-bills through Treasury Direct website rather than buying treasuries through a brokerage. Based on reading through the responses on this question, it seemed as though the tax reporting for T-bills purchased through Treasury Direct was much more onerous than just receiving a form from a brokerage, whereby I would need to manually type in each T-bill I have purchased in order to report the interest earned. I guess the short version of the question is, can I print a summary of all T-bills purchased and interest earned for a calendar year for tax reporting purposes?

Thanks in advance!
I don’t know whether this is true or not, but why not take the issue off the table by purchasing the Treasuries through your brokers website?
Last edited by MikeG62 on Thu Jun 21, 2018 4:21 pm, edited 1 time in total.
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Re: Treasury Direct Question

Post by welderwannabe » Thu Jun 21, 2018 3:29 pm

#Cruncher wrote:
Wed Jun 20, 2018 10:36 am

The "Price" and "Investment Rate" are determined using the formulas on this TreasuryDirect PDF File.
Nice find on that PDF. I never could find that data on Treasury Direct!
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Re: Treasury Direct Question

Post by FactualFran » Thu Jun 21, 2018 4:03 pm

Filife20Forty wrote:
Thu Jun 21, 2018 2:38 pm
I'm currently buying T-bills through Treasury Direct website rather than buying treasuries through a brokerage. Based on reading through the responses on this question, it seemed as though the tax reporting for T-bills purchased through Treasury Direct was much more onerous than just receiving a form from a brokerage, whereby I would need to manually type in each T-bill I have purchased in order to report the interest earned. I guess the short version of the question is, can I print a summary of all T-bills purchased and interest earned for a calendar year for tax reporting purposes?
I have not had a 1099-INT from what is currently called Treasury Direct. Many years ago I had accounts with what was previously called Treasury Direct and later called Legacy Treasury Direct. For those account 1099-INT forms were mailed.

According to the TreasuryDirect Users Guide: Form 1099-INT web page: "Totals for Interest, Amount, and Federal Income Tax Withheld are given, as well as tax filing instructions for each type of 1099 (when applicable)." On your tax return you report the total interest on the Form 1099-INT for you at the Treasury Direct web site. There is not need to enter the interest from each Treasury security.

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Re: Treasury Direct Question

Post by spdoublebass » Thu Jun 21, 2018 10:33 pm

#Cruncher wrote:
Wed Jun 20, 2018 10:36 am

Getting back to the 28-day bill you bought, spdoublebass: With a price of 99.858833, your Annual Percentage Yield [1] is
1.86% = (100 / 99.858833) ^ (365 / 28) - 1
I'm really not trying to be annoying, but I just have one last question.

I get that the price of the bond is 99.858833
I get that the interest is 1.86%

I "bought" a $100 bond. They only took out 99.86 out of my account. Will I get an interest payment of .15 and then the $100 face value back in 28 days? Is that how this works? so the Price of the bond doesn't always match the face value. But when you cash in the bond, you get the face value. The same way buying CD's on the secondary market works.

I just wanted to check that this is what will happen. Sorry again for being slow at this.
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Re: Treasury Direct Question

Post by viz » Thu Jun 21, 2018 10:44 pm

spdoublebass wrote:
Thu Jun 21, 2018 10:33 pm
#Cruncher wrote:
Wed Jun 20, 2018 10:36 am

Getting back to the 28-day bill you bought, spdoublebass: With a price of 99.858833, your Annual Percentage Yield [1] is
1.86% = (100 / 99.858833) ^ (365 / 28) - 1
I'm really not trying to be annoying, but I just have one last question.

I get that the price of the bond is 99.858833
I get that the interest is 1.86%

I "bought" a $100 bond. They only took out 99.86 out of my account. Will I get an interest payment of .15 and then the $100 face value back in 28 days? Is that how this works? so the Price of the bond doesn't always match the face value. But when you cash in the bond, you get the face value. The same way buying CD's on the secondary market works.

I just wanted to check that this is what will happen. Sorry again for being slow at this.
You get $100 back and difference between 100 & 99.86 is the interest. Thanks

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Re: Treasury Direct Question

Post by Filife20Forty » Sat Jun 23, 2018 1:12 pm

FactualFran wrote:
Thu Jun 21, 2018 4:03 pm
Filife20Forty wrote:
Thu Jun 21, 2018 2:38 pm
I'm currently buying T-bills through Treasury Direct website rather than buying treasuries through a brokerage. Based on reading through the responses on this question, it seemed as though the tax reporting for T-bills purchased through Treasury Direct was much more onerous than just receiving a form from a brokerage, whereby I would need to manually type in each T-bill I have purchased in order to report the interest earned. I guess the short version of the question is, can I print a summary of all T-bills purchased and interest earned for a calendar year for tax reporting purposes?
I have not had a 1099-INT from what is currently called Treasury Direct. Many years ago I had accounts with what was previously called Treasury Direct and later called Legacy Treasury Direct. For those account 1099-INT forms were mailed.

According to the TreasuryDirect Users Guide: Form 1099-INT web page: "Totals for Interest, Amount, and Federal Income Tax Withheld are given, as well as tax filing instructions for each type of 1099 (when applicable)." On your tax return you report the total interest on the Form 1099-INT for you at the Treasury Direct web site. There is not need to enter the interest from each Treasury security.
Thanks, FactualFran!

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