Let me use an example.

If we say the yield to maturity of 1 month treasury bill is 2.414% now, what exactly does it mean?

In actuarial notations, this number can mean effective interest rate (APY), nominal interest rate convertible m times, force of interest (continuously compounding), and many others.

What kinds of interest rate are we referring to when quoting treasury rate?


The convention for the coupon of treasury bills (and most other bonds) is to show the annualized uncompounded interest rate. So if the stated coupon for a 1-month bill is 2.414%, that means it pays a 2.414%/12 = 0.2012% coupon.

If 2.414% is the yield, then it's a different story. The yield of a bond is the return you get relative to what you pay for the bond. It's much more complicated, but the main difference is that the calculation does include compounding, unlike the coupon rate.

If we say the yield to maturity of 1 month treasury bill is 2.414% now, what exactly does it mean?

Well you also need to know the coupon rate and daycount convention, but roughly it means that your return over 1 month (amount received/amount paid) is 1.02424^1/12, so back-calculating for price would mean

P = (1+i*1/12)/(1.02414^1/12)

where i is the stated coupon rate, which is divided by 12 since you are only entitled to one month of interest.

  • Does yield to maturity uses the same convention? If the duration is less than 6 months how are things computed (If a zero coupon treasury bill is 1 month before maturity and has face value $1000 with yield 2.414%, what's the market value now?) – user67084 May 2 at 20:55
  • @gamma I just added that. yield does take compounding into effect, and is a more complicated calculation. – D Stanley May 2 at 20:56
  • OK thank you I've also edited the question to clarify – user67084 May 2 at 20:57
  • So that number is APY (according to the answer you're given here)? – user67084 May 2 at 21:09
  • @gamma it's probably YTM (yield to maturity). – D Stanley May 2 at 21:20

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