Here we look at the most liquid cash instrument in the money market's secondary market, treasury bills or T-bills.

T-bills are government issued discount instruments, meaning you buy them at a discount and receive the full face value at maturity. For example, if you bought $100 million notional of the 26 week US T-bill shown in July, you would've paid $97.335 million to receive $100 million at maturity. 182 dates later. While they're issued as discount instruments, T-bills are often quoted in terms of returns in the secondary market.

So if you contact a market maker for a T-bill price, they won't quote a price, but rather an interest rate.

For example, the bid and ask for the 182 day T-bill was quoted at 5.175% to 5.165%. This means that if you were selling the T-bill to the market maker, they would offer you a price that results in a 5.175% return for them the market maker. On the other hand, if you are buying from them, you would pay a price that results in a 5.165% return for you. This is a bid-ask spread, but instead of being quoted as a price, it's quoted as a return.

Now, here's where attention to detail is important. Depending on the issuing country, different methodologies are used to convert the quoted return into the actual price you pay for the tbi. In the US T-bills are quoted on what's known as a discount basis.

In this method, the price of the T-bill is calculated by subtracting the discount from the face value, and the discount itself is based on the face value.

Essentially, the quoted return is earned on the amount you will receive at maturity, which is somewhat unusual because we typically think of interest as being earned on the amount invested i.e. the present value.

The good news is that most other T-bills use the yield quote method where the return is based on the present value, which is the more typical way we think about interest.

So why does this matter? Well consider this. If you are quoted the same rate for both types of T-bills, everything else being equal, which one would you prefer? And the answer is you would prefer the one quoted on a discount basis since the quoted rate is applied to the face value, not the present value as it is with the yield quote.

For instance, if I was quoted a 5% return, I would prefer 5% multiplied by the face value of 100 rather than 5%, multiplied by the present value of 98. Since the face value is typically higher than the present value, the absolute return on a discount quoted instrument is higher than on a yields quoted one. Therefore, if all else is equal, the rate quoted on a discount basis should be lower than the yield quote. If they were the same, the discount quoted instrument would give you an advantage.

While this might seem quite technical, it's another reminder of how important it is to dig into the detail when comparing investment options.