An investor buys a treasury bill at a price lower than its face value…

An investor buys a treasury bill at a price lower than its face value and holds it until maturity. Consider the following statements:

(A) At maturity, the investor is repaid at par.

(B) The gain to the investor is the interest receivable on the bill.

(C) The bill was issued by the Reserve Bank of India on behalf of the Central Government.

(D) The bill carries a high risk of default.

(E) The bill was issued by a large and creditworthy company.

Which of the statements given above are correct?

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → (A), (B) and (C) only

(A) At maturity, the investor is repaid at par. — Correct. A treasury bill is issued below its face value and repaid at par, that is, at its face value.

(B) The gain to the investor is the interest receivable on the bill. — Correct. The gap between the issue price and the redemption value is the interest receivable on the bill. It is called discount.

(C) The bill was issued by the Reserve Bank of India on behalf of the Central Government. — Correct. Treasury bills are issued by the Reserve Bank of India on behalf of the Central Government.

(D) The bill carries a high risk of default. — Incorrect. Treasury bills have an assured yield and a negligible risk of default.

(E) The bill was issued by a large and creditworthy company. — Incorrect. A large and creditworthy company issues commercial paper, not a treasury bill.

NCERT (Pre-rationalised Edition): “1. Treasury Bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. Treasury bills are issued in the form of a promissory note. They are highly liquid and have assured yield and negligible risk of default. They are issued at a price which is lower than their face value and repaid at par. The difference between the price at which the treasury bills are issued and their redemption value is the interest receivable on them and is called discount. Treasury bills are available for a minimum amount of Rs 25,000 and in multiples thereof.”