A Treasury Bill is a short-term U.S. government debt instrument that matures in one year or less. Unlike bonds, T-Bills do not pay periodic coupon interest. Instead, you buy them at a discount to face value and receive the full face value at maturity. Your return is the difference between what you paid and what you receive.
For example, a 13-week (91-day) $1,000 T-Bill might be purchased for $987.80. At maturity, the U.S. Treasury pays you $1,000 — your $12.20 gain is your entire return.
The discount rate is the rate used to price T-Bills. It is calculated on a 360-day bank year basis relative to face value — it understates the true return because (a) you're earning on a smaller investment than face value, and (b) the year is assumed to be 360 days.
The coupon equivalent yield (CEY), also called the bond equivalent yield, converts the T-Bill return to an annualized yield on a 365-day basis relative to your actual purchase price. This makes it directly comparable to yields on notes, bonds, and savings accounts. The CEY is always higher than the discount rate.
When comparing a T-Bill to a high-yield savings account, always use the CEY — not the discount rate.
T-Bill interest is subject to federal income tax but is exempt from all state and local income taxes. For investors in states with high income tax rates (e.g., California at 13.3%, New York at 10.9%), this exemption can add 0.5–1.5 percentage points to the effective after-tax yield compared to a savings account or CD that is fully taxable at all levels.
The "equivalent taxable yield" shown above is the savings account rate you would need to match your T-Bill return after all taxes are considered — accounting for federal tax on both, but only state tax applying to the savings account.