Bank bill definition

Introduction

A bank bill (or bill) is a security that pays a single cash flow at its maturity date, at which time its entire principal is repaid. A bill pays no coupons during its lifetime.

Security description

A bank bill is structurally identical to a zero coupon bond, although the latter tend to have maturity dates of more than a year. Bank bills are also known as treasury bills, certificates of deposit (CDs), commercial paper, or promissory notes.

Security code

Bank bills have security type BILL.

Calculation of returns

A bill is treated as a zero coupon bond, which is priced by calculating the value of its single maturity cash flow, discounted at the current zero coupon interest rate for that maturity. A zero coupon bond is priced as follows:

$P=\frac{1}{\left(1+y\right)^{t}}$

where

$P$ is price;

$y$ is interpolated zero yield at the maturity date;

$t$ is time to maturity, measured as a fraction of a year.