In addition to issuing long term bonds, governments also issue short-term instruments such as Treasury bills (T bills) of up to one year maturity. T-bills do not carry a coupon, but are sold on a discount basis.

For example, the US Treasury, UK government and the French government are all active and regular issuers of bills. These represent the highest quality money market instruments available from a credit standpoint, and are used by researchers to measure short term risk-free rates.

In the UK, T bills are issued by the Bank of England on behalf of the government, normally on a weekly basis and normally by tender. Treasury bills can be issued for any term up to one year but the tendency has been to issue for 3 or 6 month periods. At the tender the prospective purchaser has to indicate the price he is prepared to pay. This price is a function of the interest rate expected.

We will learn about the following yield measures:

• Bank Discount Yield
• Holding Period Yield (HPY)
• Effective Annual Yield
• Money Market Yield