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Malaysian Negotiable Instruments-Treasury Bills —Understanding the Relationship Between Bills of Exchange, Cheques, Promissory Notes, Banker’s Drafts, Bank Notes and Treasury Bills
Before studying Treasury Bills, it is important to understand that although they are classified as monetary or negotiable instruments, they are fundamentally different from the instruments discussed in the previous chapters.
Bills of Exchange, Cheques, Promissory Notes and Banker’s Drafts are primarily payment instruments, while Bank Notes are legal tender used as money.
A Treasury Bill (T-Bill), however, is a short-term Government debt instrument issued to borrow money from investors. Rather than being used to buy goods or services, Treasury Bills are mainly used for investment, liquidity management and Government financing.
Why Were Treasury Bills Created?
Governments regularly require funds to finance public expenditure such as:
Investors lend money to the Government for a short period.
In return, the Government promises to repay the amount upon maturity.
7.1 Comparison Note – Bills of Exchange and Treasury Bills
A Bill of Exchange is a written order directing another person to pay money.
Its primary purpose is to facilitate commercial payment and trade credit.
A Treasury Bill, however, is not issued to settle a commercial debt.
Instead, it is issued by the Government to raise short-term funds from investors.
Memory Tip
Bill of Exchange = Trade payment.
Treasury Bill = Government borrowing.
7.2 Comparison Note – Cheques and Treasury Bills
A Cheque is used to make payment from a customer’s bank account.
Once honoured, the debt is discharged.
A Treasury Bill is not used to pay for goods or services.
Instead, it represents an investment in which the investor temporarily lends money to the Government.
Memory Tip
Cheque = Paying money.
Treasury Bill = Investing money.
7.3 Comparison Note – Promissory Notes and Treasury Bills
A Promissory Note contains a personal promise by the Maker to pay money.
The Maker is usually an individual or business.
A Treasury Bill also represents a promise to repay money.
However, the promise is made by the Government, making Treasury Bills one of the safest investment instruments available.
Memory Tip
Promissory Note = Individual promises to pay.
Treasury Bill = Government promises to repay.
7.4 Comparison Note – Banker’s Drafts and Treasury Bills
A Banker’s Draft is issued by a bank to facilitate secure payment.
Its purpose is to transfer money safely.
A Treasury Bill is not a payment instrument.
Its purpose is to raise Government funds while providing investors with a secure short-term investment.
Memory Tip
Banker’s Draft = Secure payment.
Treasury Bill = Secure investment.
7.5 Comparison Note – Bank Notes and Treasury Bills
A Bank Note is legal tender.
It is the money itself.
A Treasury Bill is not legal tender.
It cannot normally be used to buy groceries, pay restaurant bills or purchase everyday goods.
Instead, it represents a financial investment that matures on a future date.
Memory Tip
Bank Note = Spend it.
Treasury Bill = Invest it.
Case Scenario
Sarah has RM500,000 available.
She is considering three options.
Sarah asks:
“Why are Treasury Bills considered one of the safest investments?”
This chapter answers that question.
Introduction
A Treasury Bill (T-Bill) is a short-term Government security issued to raise funds for Government operations.
Treasury Bills are normally issued for short periods, such as 3 months, 6 months or 12 months, although the exact terms depend on Government issuance.
Unlike shares, Treasury Bills do not represent ownership in a company.
Unlike Bank Notes, they are not money.
Instead, they represent a promise by the Government to repay investors upon maturity.
Because they are backed by the Government, Treasury Bills are generally regarded as one of the lowest-risk investment instruments available.
Questions and Answers
Q1. What is a Treasury Bill?
A Treasury Bill is a short-term Government debt security issued to borrow money from investors.
The Government promises to repay the investor on the maturity date.
Q2. Why does the Government issue Treasury Bills?
The Government issues Treasury Bills to obtain short-term financing for public expenditure and cash-flow management.
Q3. Who issues Treasury Bills in Malaysia?
Treasury Bills are issued by the Government of Malaysia through Bank Negara Malaysia, acting as the Government’s banker and agent.
Q4. Who may purchase Treasury Bills?
Treasury Bills may be purchased by:
Q5. Why are Treasury Bills considered low risk?
They are generally regarded as low risk because repayment is backed by the Government.
For this reason, many financial institutions include Treasury Bills within their investment portfolios.
Q6. Are Treasury Bills negotiable?
Yes.
Treasury Bills are generally transferable and may be traded in the secondary market before maturity, subject to applicable laws and market practices.
Q7. Do Treasury Bills pay regular interest?
Treasury Bills generally do not pay periodic interest like ordinary fixed deposits.
Instead, investors usually earn a return because the Treasury Bill is purchased at a discount and redeemed at its full face value upon maturity.
(Discounting will be discussed in Part 2.)
Legal Mechanism – How Treasury Bills Work
Step 1 – The Government Requires Funds
The Government needs money for public expenditure and short-term financial management.
Legal Position
Instead of immediately increasing taxes, the Government decides to borrow money.
Step 2 – Treasury Bills are Issued
The Government issues Treasury Bills through Bank Negara Malaysia.
Legal Position
Investors are invited to purchase the Treasury Bills.
Step 3 – Investors Purchase Treasury Bills
Banks, corporations and other investors purchase Treasury Bills by paying the purchase price.
Legal Position
The Government receives the funds.
The investor becomes the lawful holder of the Treasury Bill.
Step 4 – The Government Uses the Funds
The Government uses the money to finance public expenditure.
Legal Position
The Treasury Bill remains outstanding until maturity.
Step 5 – Treasury Bill Reaches Maturity
The maturity date arrives.
Legal Position
The Government becomes obliged to redeem the Treasury Bill according to its terms.
Step 6 – Investor Receives Payment
The investor receives the redemption amount from the Government.
Legal Position
The Treasury Bill is discharged.
The investment transaction is completed.
Rights and Liabilities
The Government
Responsible for:
Bank Negara Malaysia
Responsible for:
Investors
Entitled to:
Practical Example
A commercial bank purchases RM50 million worth of Treasury Bills.
Six months later, the Treasury Bills mature.
The Government redeems the Treasury Bills according to their terms.
The bank earns a return through the difference between the discounted purchase price and the redemption value.
Why Do Investors Buy Treasury Bills?
Investors commonly purchase Treasury Bills because they provide:
Practical Applications
Treasury Bills are commonly used by:
Examination Tips
Whenever answering examination questions involving Treasury Bills, ask:
Memory Tips
Bill of Exchange
“Trade payment.”
Cheque
“Bank payment.”
Promissory Note
“Personal promise.”
Banker’s Draft
“Guaranteed payment.”
Bank Note
“The money itself.”
Treasury Bill
“Government borrowing.”
Conclusion
A Treasury Bill is fundamentally different from the negotiable instruments previously discussed. Rather than facilitating payment, it enables the Government to borrow money from investors for short periods while providing a secure investment opportunity. Because Treasury Bills are backed by the Government, they are widely regarded as one of the safest financial instruments available. Understanding their legal mechanism, commercial purpose and investment characteristics is essential for appreciating their role within Malaysia’s financial and monetary system.
Quick Revision Summary
Before studying Treasury Bills, it is important to understand that although they are classified as monetary or negotiable instruments, they are fundamentally different from the instruments discussed in the previous chapters.
Bills of Exchange, Cheques, Promissory Notes and Banker’s Drafts are primarily payment instruments, while Bank Notes are legal tender used as money.
A Treasury Bill (T-Bill), however, is a short-term Government debt instrument issued to borrow money from investors. Rather than being used to buy goods or services, Treasury Bills are mainly used for investment, liquidity management and Government financing.
Why Were Treasury Bills Created?
Governments regularly require funds to finance public expenditure such as:
- roads and highways;
- hospitals;
- schools and universities;
- public transportation;
- defence;
- Government administration.
Investors lend money to the Government for a short period.
In return, the Government promises to repay the amount upon maturity.
7.1 Comparison Note – Bills of Exchange and Treasury Bills
A Bill of Exchange is a written order directing another person to pay money.
Its primary purpose is to facilitate commercial payment and trade credit.
A Treasury Bill, however, is not issued to settle a commercial debt.
Instead, it is issued by the Government to raise short-term funds from investors.
Memory Tip
Bill of Exchange = Trade payment.
Treasury Bill = Government borrowing.
7.2 Comparison Note – Cheques and Treasury Bills
A Cheque is used to make payment from a customer’s bank account.
Once honoured, the debt is discharged.
A Treasury Bill is not used to pay for goods or services.
Instead, it represents an investment in which the investor temporarily lends money to the Government.
Memory Tip
Cheque = Paying money.
Treasury Bill = Investing money.
7.3 Comparison Note – Promissory Notes and Treasury Bills
A Promissory Note contains a personal promise by the Maker to pay money.
The Maker is usually an individual or business.
A Treasury Bill also represents a promise to repay money.
However, the promise is made by the Government, making Treasury Bills one of the safest investment instruments available.
Memory Tip
Promissory Note = Individual promises to pay.
Treasury Bill = Government promises to repay.
7.4 Comparison Note – Banker’s Drafts and Treasury Bills
A Banker’s Draft is issued by a bank to facilitate secure payment.
Its purpose is to transfer money safely.
A Treasury Bill is not a payment instrument.
Its purpose is to raise Government funds while providing investors with a secure short-term investment.
Memory Tip
Banker’s Draft = Secure payment.
Treasury Bill = Secure investment.
7.5 Comparison Note – Bank Notes and Treasury Bills
A Bank Note is legal tender.
It is the money itself.
A Treasury Bill is not legal tender.
It cannot normally be used to buy groceries, pay restaurant bills or purchase everyday goods.
Instead, it represents a financial investment that matures on a future date.
Memory Tip
Bank Note = Spend it.
Treasury Bill = Invest it.
Case Scenario
Sarah has RM500,000 available.
She is considering three options.
- Deposit the money into a savings account.
- Purchase company shares.
- Purchase Malaysian Treasury Bills.
- very low risk;
- predictable returns;
- short-term investment.
Sarah asks:
“Why are Treasury Bills considered one of the safest investments?”
This chapter answers that question.
Introduction
A Treasury Bill (T-Bill) is a short-term Government security issued to raise funds for Government operations.
Treasury Bills are normally issued for short periods, such as 3 months, 6 months or 12 months, although the exact terms depend on Government issuance.
Unlike shares, Treasury Bills do not represent ownership in a company.
Unlike Bank Notes, they are not money.
Instead, they represent a promise by the Government to repay investors upon maturity.
Because they are backed by the Government, Treasury Bills are generally regarded as one of the lowest-risk investment instruments available.
Questions and Answers
Q1. What is a Treasury Bill?
A Treasury Bill is a short-term Government debt security issued to borrow money from investors.
The Government promises to repay the investor on the maturity date.
Q2. Why does the Government issue Treasury Bills?
The Government issues Treasury Bills to obtain short-term financing for public expenditure and cash-flow management.
Q3. Who issues Treasury Bills in Malaysia?
Treasury Bills are issued by the Government of Malaysia through Bank Negara Malaysia, acting as the Government’s banker and agent.
Q4. Who may purchase Treasury Bills?
Treasury Bills may be purchased by:
- banks;
- insurance companies;
- pension funds;
- corporations;
- institutional investors;
- eligible individual investors.
Q5. Why are Treasury Bills considered low risk?
They are generally regarded as low risk because repayment is backed by the Government.
For this reason, many financial institutions include Treasury Bills within their investment portfolios.
Q6. Are Treasury Bills negotiable?
Yes.
Treasury Bills are generally transferable and may be traded in the secondary market before maturity, subject to applicable laws and market practices.
Q7. Do Treasury Bills pay regular interest?
Treasury Bills generally do not pay periodic interest like ordinary fixed deposits.
Instead, investors usually earn a return because the Treasury Bill is purchased at a discount and redeemed at its full face value upon maturity.
(Discounting will be discussed in Part 2.)
Legal Mechanism – How Treasury Bills Work
Step 1 – The Government Requires Funds
The Government needs money for public expenditure and short-term financial management.
Legal Position
Instead of immediately increasing taxes, the Government decides to borrow money.
Step 2 – Treasury Bills are Issued
The Government issues Treasury Bills through Bank Negara Malaysia.
Legal Position
Investors are invited to purchase the Treasury Bills.
Step 3 – Investors Purchase Treasury Bills
Banks, corporations and other investors purchase Treasury Bills by paying the purchase price.
Legal Position
The Government receives the funds.
The investor becomes the lawful holder of the Treasury Bill.
Step 4 – The Government Uses the Funds
The Government uses the money to finance public expenditure.
Legal Position
The Treasury Bill remains outstanding until maturity.
Step 5 – Treasury Bill Reaches Maturity
The maturity date arrives.
Legal Position
The Government becomes obliged to redeem the Treasury Bill according to its terms.
Step 6 – Investor Receives Payment
The investor receives the redemption amount from the Government.
Legal Position
The Treasury Bill is discharged.
The investment transaction is completed.
Rights and Liabilities
The Government
Responsible for:
- issuing Treasury Bills;
- honouring repayment upon maturity;
- maintaining investor confidence.
Bank Negara Malaysia
Responsible for:
- administering Treasury Bill issuance;
- conducting auctions where applicable;
- facilitating settlement.
Investors
Entitled to:
- purchase Treasury Bills;
- hold them until maturity;
- transfer them where permitted;
- receive payment upon maturity.
Practical Example
A commercial bank purchases RM50 million worth of Treasury Bills.
Six months later, the Treasury Bills mature.
The Government redeems the Treasury Bills according to their terms.
The bank earns a return through the difference between the discounted purchase price and the redemption value.
Why Do Investors Buy Treasury Bills?
Investors commonly purchase Treasury Bills because they provide:
- very low investment risk;
- Government-backed repayment;
- short-term investment opportunities;
- predictable returns;
- liquidity through secondary market trading.
Practical Applications
Treasury Bills are commonly used by:
- commercial banks;
- central banks;
- Government agencies;
- pension funds;
- insurance companies;
- investment funds;
- corporate treasury departments.
Examination Tips
Whenever answering examination questions involving Treasury Bills, ask:
- Who issued the Treasury Bill?
- Why was it issued?
- Who purchased it?
- When does it mature?
- Is it being used as a payment instrument or as an investment?
Memory Tips
Bill of Exchange
“Trade payment.”
Cheque
“Bank payment.”
Promissory Note
“Personal promise.”
Banker’s Draft
“Guaranteed payment.”
Bank Note
“The money itself.”
Treasury Bill
“Government borrowing.”
Conclusion
A Treasury Bill is fundamentally different from the negotiable instruments previously discussed. Rather than facilitating payment, it enables the Government to borrow money from investors for short periods while providing a secure investment opportunity. Because Treasury Bills are backed by the Government, they are widely regarded as one of the safest financial instruments available. Understanding their legal mechanism, commercial purpose and investment characteristics is essential for appreciating their role within Malaysia’s financial and monetary system.
Quick Revision Summary
- Treasury Bills are short-term Government securities.
- They are issued through Bank Negara Malaysia on behalf of the Government.
- Their primary purpose is Government borrowing, not commercial payment.
- They are generally considered low-risk investments because they are Government-backed.
- Investors usually earn a return through discounting, rather than periodic interest.
- Golden Rule: If the Government is borrowing money for a short period, you are dealing with a Treasury Bill.
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