Treasury Bill Discount Rate vs Investment Rate, Explained
Look up the results of a Treasury bill auction and you will usually see two percentages side by side: a discount rate and an investment rate. They describe the same bill, bought at the same price, held for the same number of days. Yet the investment rate is always a little higher. The gap is not a fee or a bonus. It comes from two different ways of doing the arithmetic, and once you see both, you can compare a T-bill with a savings account or a CD on fair terms.
1. How a T-bill pays you
TreasuryDirect describes bills as short-term securities that mature in one year or less. As of October 2026, terms run 4, 6, 8, 13, 17, 26, and 52 weeks, with a $100 minimum purchase in $100 steps.
A bill does not send you interest payments. Instead, you pay less than face value up front, and the Treasury pays you the full face value at maturity. TreasuryDirect puts it simply: the difference between the face value and the discounted price you pay is the "interest."
TreasuryDirect also notes that the interest is subject to federal income tax but not state or local income tax, which matters when you compare it with a bank product that is taxed at every level.
2. The discount rate: how the price is set
The Treasury prices bills from the discount rate with this formula, published both on TreasuryDirect and in Appendix B to 31 CFR Part 356:
Price = Face value x (1 - discount rate x days / 360)
Two details make this rate look smaller than what you actually earn:
- It uses a 360-day year, even though a real year has 365 or 366 days.
- It measures the discount as a share of the face value, not of the smaller amount you actually paid.
TreasuryDirect's own example: a $1,000 26-week bill (182 days) sold at a discount rate of 0.145% costs $999.27, so you earn $0.73 when it matures.
3. The investment rate: what your money actually earns
The investment rate, which the regulation also calls the coupon-equivalent yield, fixes both of those quirks. For bills of not more than half a year, Appendix B gives a formula that, in plain words, works like this:
Investment rate = (Face value - Price) / Price x (365 / days)
It divides your gain by the amount you put in and scales it to a 365-day year (366 if the year after issue includes February 29). The regulation's own worked example is a 20-day bill bought at a discount rate of 7.930%: the investment rate comes out to 8.076%.
For bills longer than half a year, such as the 52-week bill, Appendix B switches to a more complex formula solved with the quadratic equation. That version treats the bill as if it were a note paying interest twice a year, so its result can be compared with Treasury notes and bonds.
4. A worked example at a 4.00% discount rate
To keep the numbers clean, assume a $1,000 bill at a discount rate of exactly 4.00% (an assumption for illustration, not a current auction result), and a 365-day year.
| Term | Days | Price you pay | Interest at maturity | Investment rate |
|---|---|---|---|---|
| 4 weeks | 28 | $996.89 | $3.11 | 4.068% |
| 13 weeks | 91 | $989.89 | $10.11 | 4.097% |
| 26 weeks | 182 | $979.78 | $20.22 | 4.139% |
| 52 weeks | 364 | $959.56 | $40.44 | 4.183% |
The 4, 13, and 26-week rows use the half-year formula above. The 52-week row uses the longer-bill quadratic formula from Appendix B, which gives 4.183%; the simple formula would show about 4.226%. Take the 13-week row step by step:
- Price: $1,000 x (1 - 0.04 x 91 / 360) = $989.89.
- Interest: $1,000 - $989.89 = $10.11.
- Investment rate: $10.11 / $989.89 x 365 / 91 = about 4.097%.
Notice the pattern. The longer the bill, the bigger the discount, so the price you pay shrinks and the gap between the two rates widens. At the same 4.00% discount rate, the 52-week bill's investment rate is about 0.18 percentage points higher, while the 4-week bill's is only about 0.07 points higher.
5. Which rate to use when comparing
The discount rate is a pricing convention. It tells you what you will pay, and auctions are run on it. The investment rate answers the question most savers actually have: what annual return does the money actually earn?
So when you line a T-bill up against other options, use the investment rate:
- Against a savings account or CD, the closer match is the bank's APY, since both describe a yearly return on the money you deposit. The investment rate is a simple annualized figure for one bill; rolling over depends on future auction rates.
- Against a Treasury note, the investment rate is built to be comparable, which is the reason Appendix B defines it as a coupon-equivalent yield.
- After taxes, remember the state and local exemption. For someone in a high-tax state, a bill and a fully taxable bank account with the same stated return do not leave the same amount in your pocket.
6. Reading an auction result yourself
When you look at an auction result, you may see a "high" discount rate and investment rate, along with a price per $100. To check it:
- Note the number of days to maturity.
- Multiply the price per $100 by your purchase amount divided by 100. A $5,000 bill at a price of 98.9 costs $4,945.
- Subtract that from face value to get your dollar interest.
- Divide the interest by the price and multiply by 365 over the days to see the investment rate.
Small differences from the published figure come from rounding: the Treasury rounds prices per $100 to six decimal places.
7. Key takeaways
- A T-bill is bought below face value; your interest is the difference you collect at maturity.
- The discount rate uses a 360-day year and measures the discount against face value, which makes it look lower.
- The investment rate divides your gain by what you paid and uses a 365-day year, so it is always higher.
- At a 4.00% discount rate, a 13-week bill's investment rate is about 4.097%; a 52-week bill's is about 4.183%.
- Compare T-bills with other savings options using the investment rate, and factor in the state and local tax exemption.