This means that once the institutional investors, including mutual fund and pension managers, make their purchase through the auction process, an average interest rate is calculated. This average rate becomes the rate offered to noncompetitive bidders. The discount is based on the interest rate and is an immediate return of the interest earned over the term of the purchased T-bill. The interest rate actually earned is not the same as the discount received, because the interest rate is based on the amount actually invested. Treasury notes earn a slightly higher interest rate than T-bills, because the term is longer.
Interest is fixed and paid to the investor semiannually.
Interest is exempt from state and local taxes, but not Federal taxes. In January 1997, the Federal Government issued its first inflation-indexed bonds. Interest payments are made semiannually at one-half the annual rate. In 10 years the principal is returned. There is a 3-month lag in inflation adjustments.