A Treasury Note, often referred to as a T-Note, is an intermediate-term debt obligation issued by the U.S. Department of the Treasury. With maturities ranging from one to ten years, Treasury Notes bear interest that is paid semiannually via coupon payments. As direct obligations of the U.S. government, they are considered to have the highest credit quality and, consequently, offer yields that are typically lower than other taxable securities with equivalent maturities.
Characteristics of Treasury Notes
Maturity
Treasury Notes have maturities between one and ten years. Examples of common maturities include:
- 2 years
- 3 years
- 5 years
- 7 years
- 10 years
Coupon Payments
Interest on T-Notes is paid semi-annually. The coupon rate is fixed for the life of the note and reflects the note’s yield at the time of issuance.
Yield
The yield on Treasury Notes is generally lower than other taxable bonds of the same maturity because they are perceived as being free of credit risk. Yield is calculated as:
Taxation
Interest income from Treasury Notes is subject to federal income tax but exempt from state and local taxes.
Types of Treasury Notes
- Standard T-Notes: These are the conventional Treasury Notes with fixed coupon payments.
- Floating Rate Notes (FRNs): These have variable interest rates that adjust periodically based on changes in the rate of a standard reference, such as the 13-week Treasury bill auction rate.
Benefits of Investing in Treasury Notes
Safety and Credit Quality
Treasury Notes are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
Predictable Income
The fixed coupon payments provide a reliable and predictable stream of income.
Liquidity
Treasury Notes have high liquidity due to their active trading in the secondary market.
Historical Context
The issuance of Treasury Notes began in the early 20th century as part of the U.S. government’s efforts to manage national debt and finance public expenditures. Over time, they have become a foundational element of financial planning and portfolio management for both individual and institutional investors.
Comparisons to Other Investment Options
Treasury Bills (T-Bills) vs. Treasury Notes
- Maturity: T-Bills have maturities of one year or less, whereas T-Notes are one to ten years.
- Interest Payment: T-Bills are sold at a discount and do not pay periodic interest, while T-Notes provide semiannual coupon payments.
Treasury Bonds vs. Treasury Notes
- Maturity: Treasury Bonds have maturities longer than ten years.
- Interest Rate: Both offer fixed-rate coupons, but Treasury Bonds may have higher yields due to their longer maturity.
Related Terms
- Coupon: The interest payment made to the bondholder.
- Yield: The return an investor realizes on a bond.
- Face Value: The amount paid to the bondholder at maturity.
- Secondary Market: A market where investors purchase securities or assets from other investors rather than from issuing company.
FAQs
Q: How often do Treasury Notes pay interest?
Q: Are Treasury Notes risk-free?
Q: Can I sell a Treasury Note before it matures?
References
- U.S. Department of the Treasury. (n.d.). Treasury Notes. Retrieved from treasury.gov
- Reilly, F. K., & Brown, K. C. (2012). Analysis of Investments & Management of Portfolios. South-Western Cengage Learning.
Summary
Treasury Notes represent a reliable, intermediate-term investment with minimal credit risk due to the backing of the U.S. government. They offer predictable income through fixed semiannual coupon payments and have high liquidity in the secondary market. Whether used for steady income or as a safe haven in uncertain markets, Treasury Notes remain a staple in the financial portfolios of many investors.
