What is a Treasury Note?

Treasury Note

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Treasury Note

A Treasury Note (often simply called a “T-note”) is a type of U.S. government debt security with a fixed interest rate and a maturity period ranging from 2 to 10 years. Treasury notes are issued by the U.S. Department of the Treasury to raise funds for various government expenditures, such as infrastructure projects, social programs, and to pay off maturing debt.

Here are some key features and details about Treasury Notes:

  • Interest Payments: T-notes pay interest every six months until maturity. This interest payment is also commonly referred to as the “coupon payment.”
  • Principal Repayment: The face value (or principal) of the T-note is paid back to the investor upon maturity.
  • Intermediate Duration: With maturities ranging from 2 to 10 years, T-notes fall between short-term Treasury Bills (which mature in less than one year) and long-term Treasury Bonds (which can have maturities of up to 30 years).
  • Safety: Because they are backed by the full faith and credit of the U.S. government, T-notes are considered to be one of the safest investments available.
  • Liquidity: T-notes are highly liquid securities, meaning they can be easily sold in the secondary market.
  • Exempt from State and Local Taxes: The interest income from T-notes is exempt from state and local taxes, although it is subject to federal income tax.
  • Purchase Methods: Individuals can buy T-notes directly from the U.S. Treasury through the TreasuryDirect website or indirectly through banks, brokers, and dealers.
  • Price and Yield: The price of a T-note in the secondary market can fluctuate based on various factors, including changes in interest rates. When market interest rates rise, the price of existing T-notes (with lower rates) generally falls, and vice versa. This inverse relationship between price and yield is a fundamental concept in bond investing.

Treasury Notes, along with Treasury Bills and Treasury Bonds, are instrumental in setting benchmark interest rates and are closely watched by financial markets, economists, and policymakers as indicators of broader investor sentiment and confidence in the U.S. government.

Example of a Treasury Note

Let’s walk through a hypothetical example to better understand how a Treasury Note (T-note) works.

Scenario: Imagine you’re an investor looking to invest in a safe and secure financial instrument. After some research, you decide to purchase a 5-year U.S. Treasury Note with a face value of $10,000 and a fixed interest rate (coupon rate) of 2% per annum.

Key Details:

  • Face Value: $10,000
  • Coupon Rate: 2% per annum
  • Maturity: 5 years

How the T-note works for you:

  • Interest Payments:
    • Every six months, you will receive an interest payment based on the coupon rate.
    • 2% of $10,000 is $200 per year. Since interest is paid semi-annually, you will receive $100 every six months.
  • Principal Repayment:
    • At the end of the 5-year period, you will receive the face value of the T-note back, which is $10,000.
  • Total Earnings:
    • Over the 5 years, you’ll receive a total of $1,000 in interest payments ($200 per year x 5 years).
    • Including the principal repayment, you’ll get back a total of $11,000 at the end of 5 years.

Now, imagine interest rates rise:

  • After two years, let’s say the prevailing interest rates rise to 3%. If you were to sell your T-note in the secondary market, its value would likely be less than $10,000. This is because new T-notes would be offering a 3% interest rate, making your 2% T-note less attractive.
  • Conversely, if interest rates had dropped to 1%, your T-note with a 2% yield would be more valuable in the secondary market, and its price would likely be higher than the initial $10,000 you paid.

This example provides a basic understanding of how T-notes operate, how they can generate income for investors through interest payments, and how their prices can fluctuate based on changing interest rates in the economy.

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