Although I will use United States T-bills as an example, this article may be used for any T-Bill in the world, as the concepts are the same. I learned the basics of this from the Asian Institute of Management in the Philipines where I graduated with a Master's in Entrepreneurship (M.E.) degree.

1. Treasury bills (T-bills) are direct, unconditional, and general obligations of the Federal Government. They are sold to accredited financial intermediaries (dealers) and the dealers sell the T-bills to the general public.

2. T-bills are non-interest bearing securities redeemable at par upon maturity. They are therefore sold at a discount from par. The discount constitutes the interest income of the investor. Selling prices are determined using the "true discount" formula which is a function of par value, interest rate (quoted at an annual rate), and tenor (term to maturity) of the T-bill.

3. As with other fixed-income instruments, the discount from T-bills are subject to a final tax. The tax is collected upon purchase, i.e., a "front-loaded" tax. The gross price paid by the buyer is therefore the discounted price plus the tax. Another pricing convention for T-bills is the use of a 360-day base year in allocating the annual rate to the tenor of the T-bill. There are no other fees involved as the dealer will simply sell the T-bill at an interest rate which covers his spread. However, these taxes do not apply to state and local taxes.

4. You can buy new issues of treasury bills directly in any of the facilities of the Federal Reserve Bank in the primary market without commissions or fees charged. Also, you can buy new issues of treasury bills through banks and brokerage firms that charge commissions for their services and you can also buy and sell existing treasury bills in the secondary markets through banks and brokerage firms.

Here is how to compute the Price and Maturity Valueof T-bills:

Formula for Selling Price

In a more convenient form, the formula for selling price given the par value of the T-bil is:

S =   P x (360 + r x t x 0.2)

        (360 + r x t)

where S = Selling Price

          r = interest rate

          t = tenor

          P = par value

Formula for Maturity Value:

Similarly the formula for maturity value is:

M = S x (360 + r x t)

       (360 + r x t x 0.2)

where M = maturity value

Treasury bills do have a place in every individual investor's balanced portfolio and are considered risk-free becvause they are backed up by the guarantee of the federal Government.  To learn more about buying out Treasury BIlls directly from the United States Department of Treasury, you can also check out their link at: http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm