Treasury Bills, Notes, and Bonds

Three Treasury securities

Treasury bills, notes, and bonds are debt obligations issued by the U.S. Treasury. They differ mainly in maturity and payment structure. Bills mature in one year or less and generally do not pay periodic coupons. Notes have intermediate terms, and bonds have longer terms; both pay interest every six months under current Treasury marketable-security descriptions.

TreasuryDirect describes notes as issued for terms such as 2, 3, 5, 7, or 10 years and bonds for longer terms, including 20 or 30 years. Specific auction offerings and terms should be verified from Treasury materials. The broad distinction is that bills are short-term discount instruments, notes are intermediate-term coupon securities, and bonds are long-term coupon securities.

A Treasury security is a marketable government obligation, not an FDIC-insured bank deposit. It has its own market price, maturity, and payment terms. Investors may buy at auction or through a brokerage market, depending on the security and access method. A holder who sells before maturity receives the market price, which may be below or above the amount paid.

The word bond is sometimes used informally for all debt securities, but Treasury bills, notes, and bonds have specific maturity conventions. Read the instrument description and maturity date. The security's name tells you something about its term, but the actual offering information and cash-flow schedule control.

Treasury bills and discount pricing

A Treasury bill is generally issued at face value or at a discount and pays its face amount at maturity. The difference between purchase price and face value is the investor's interest. For example, a bill bought for $9,900 and redeemed for $10,000 produces $100 before taxes and transaction costs if held to maturity and paid as promised.

Treasury's illustrative discount-price formula uses a discount rate and a 360-day convention: price = face value × [1 − (discount rate × days to maturity ÷ 360)]. Market quotations can use different yield conventions, so a quoted discount rate is not always equal to the investor's annualized return on purchase price.

Suppose a $10,000 face-value bill has a 90-day discount rate of 4% under that formula. Price = $10,000 × [1 − (0.04 × 90 ÷ 360)] = $9,900. The investor receives $10,000 at maturity, earning $100. The holding-period return on the purchase price is $100 ÷ $9,900, or about 1.01% for 90 days before costs and taxes.

That simple holding return is not automatically the annualized yield. Annualizing requires a day-count and compounding convention. A bill's quoted discount rate may use face value as the base, while an investment yield may use purchase price. For exam problems, follow the stated convention and do not mix the two.

Bills can be purchased at auction or in the secondary market. At maturity, the Treasury pays face value under the terms. Before maturity, the market price can change as interest rates and demand change. A short remaining term generally limits price sensitivity relative to a longer instrument, but a sale before maturity can still produce a gain or loss.

Treasury notes and bonds

Treasury notes and bonds pay interest semiannually, with principal repaid at maturity under their terms. The stated coupon rate is applied to face value to determine interest payments. A $1,000 note with a 4% annual coupon pays $40 per year, ordinarily in two $20 installments, before taxes.

Coupon rate is not the same as yield to maturity. Coupon describes the periodic cash interest relative to face value. Yield to maturity reflects the price paid, future coupon payments, principal repayment, and time to maturity under a reinvestment assumption. A security with a 4% coupon can have a yield above or below 4% if its market price differs from par.

If a note's yield to maturity equals its coupon rate under the standard pricing framework, its price is near par. If market yield exceeds coupon, investors may pay less than face value, so the price is at a discount. If market yield falls below coupon, the price may rise above face value, or trade at a premium.

For a simple example, an investor buys a $1,000-face note with a 5% coupon when comparable market yields are 6%. The note still pays $50 annually in two installments, but new investors require a higher yield. The price must fall below $1,000 to compensate the buyer for the lower coupon relative to market rates, assuming other terms are comparable.

When yields fall below the coupon rate, a buyer may pay above par for the note's higher cash payments. The premium is offset partly by the fact that only face value is due at maturity. Price, coupon income, and maturity value work together; focusing on the coupon alone does not show total return.

Interest-rate risk and holding period

Fixed-rate note and bond prices generally move inversely to market yields. When required yields rise, existing fixed payments are less attractive and prices generally decline. When yields fall, existing higher coupons can become more valuable. Longer-maturity securities are often more sensitive to yield changes than shorter-maturity securities, though coupon and other features also matter.

An investor who holds a Treasury security to maturity and receives all promised payments avoids realizing an interim market-price decline, but still bears opportunity cost and inflation risk. The funds remain tied up, and reinvesting coupons or maturity proceeds may occur at different rates. A client needing cash before maturity may have to sell at the prevailing price.

Reinvestment risk affects coupon payments and maturing bills. If rates fall, future interest or rolled-over proceeds may earn less. A ladder can stagger maturities and reduce the need to sell long securities at an inconvenient time, but it does not lock a single yield across the entire balance or eliminate price risk.

Inflation reduces purchasing power of fixed nominal payments. A Treasury note can return every promised dollar and still produce a negative real return if inflation is high relative to yield. Treasury Inflation-Protected Securities have different principal adjustment mechanics and are covered in a separate topic; ordinary bills, notes, and bonds do not adjust principal for CPI.

Treasury securities are often regarded as having very low U.S. dollar credit risk, but 'risk-free' can be misleading for an investor's objective. Prices fluctuate, inflation changes real value, and a foreign investor may face currency risk. A security can be creditworthy yet unsuitable for a near-term cash need if its market value changes before sale.

Buying at auction and in the market

Treasury securities are issued through auctions. The terms, maturity, interest rate, price, and settlement details are stated for each offering. Investors should check the auction announcement and results rather than rely on a past offering. Auction procedures and available maturities are described by TreasuryDirect.

Investors can also buy marketable Treasury securities in the secondary market through a broker. The purchase price may include accrued interest for coupon securities, and the quoted clean price may not equal the full amount paid at settlement. Brokerage fees or markups can affect the investor's result. Review trade confirmations.

TreasuryDirect provides direct access for many individual investors, while a brokerage account may offer broader trading and account features. Holding method affects transfer, sale, recordkeeping, and estate administration. The security's underlying payment terms remain important regardless of the platform.

The secondary market lets investors sell before maturity, but it does not guarantee a particular price. A large price move or market disruption can affect execution. A plan that depends on selling at par on a specific date should account for price risk and settlement timing.

Worked comparison: bill versus note

A client needs $25,000 in six months for a tuition payment. The client compares a six-month Treasury bill with a five-year Treasury note. The bill's maturity more closely matches the expense date and has no periodic coupon. The note pays semiannual interest and may offer a different yield, but its market price can be more sensitive to rate changes if sold after six months.

If the client buys the note and yields rise, its price may fall before tuition is due. If yields fall, the note's price may rise, but selling value is still uncertain. Holding a bill to maturity aligns principal repayment with the expense, assuming the Treasury pays as promised. The bill's return may be lower or higher depending on auction terms, and reinvestment or inflation risk remains.

The appropriate comparison includes maturity, yield convention, transaction costs, tax treatment, liquidity, and the client's ability to delay the expense. A higher yield on the longer note does not automatically compensate for price risk if the money has a fixed use date. A short bill can be a better cash-flow match even if another security has greater income potential.

Worked case: a premium Treasury note

Suppose an investor buys a $1,000-face Treasury note with a 6% coupon for $1,080, with several years remaining. The note pays $60 annually in two installments and repays $1,000 at maturity. The investor receives coupon income but will experience a $80 difference between purchase price and maturity principal if held to maturity, before considering timing and reinvestment.

If market yields fall further, the note's price may rise because its coupon is attractive relative to new issues. If yields rise, price may fall. The investor's realized return depends on purchase price, coupon payments, reinvestment, holding period, and sale price. The coupon rate alone is not the yield.

If the investor sells after one year for $1,030, the proceeds plus coupons determine the realized result, not the original yield quote. The price loss or gain relative to purchase must be combined with coupon income and transaction costs. A client should understand whether a stated figure is coupon, current yield, yield to maturity, or realized holding-period return.

Taxes and account context

Interest income, discount accretion, and gains or losses can have tax consequences. Federal, state, and local treatment can differ by security and investor circumstances. Do not assume every Treasury return is tax-free at all levels or that all investors receive the same after-tax outcome. Use current tax guidance or a qualified tax professional for individual cases.

A taxable account and tax-advantaged account may have different after-tax results. The investor's bracket, holding period, purchase method, and instrument matter. A tax-exempt municipal security may be compared with a taxable Treasury only on an appropriate after-tax basis and after analyzing credit and liquidity risk.

A Treasury holding can serve as liquidity reserve, income source, or portfolio diversifier, but the role depends on maturity and client goals. A long bond may have significant price volatility despite the issuer's credit quality. A short bill may provide a closer cash-flow match but expose the investor to reinvestment when it matures.

Common Treasury security errors

Do not call the coupon rate the yield to maturity. Coupon is based on face value; yield also reflects price and timing.

Do not assume a bill pays semiannual interest. Treasury bills are discount instruments that generally pay face value at maturity.

Do not assume a note or bond's principal is protected from market-price changes before maturity. A sale price can be below purchase price.

Do not mix the bill discount-rate formula with an investment yield formula. Follow the stated day-count and quotation convention.

Do not describe Treasury securities as FDIC-insured. They are government obligations, not bank deposits.

A practical Treasury analysis

Identify the security type, face amount, price, coupon or discount structure, issue date, maturity date, and payment schedule. Determine whether the figure is a coupon, discount rate, current yield, or yield to maturity. For a secondary purchase, account for accrued interest and transaction costs.

Match the security's maturity to the client's cash needs and risk tolerance. Consider the effect of a rate change if the investor might sell early. Review reinvestment needs for coupons and maturity proceeds, and assess inflation and tax effects. A maturity match can reduce the need for an untimely sale but does not guarantee a specific real return.

Use official TreasuryDirect descriptions for current security terms and offering information. Terms and auction schedules can change. Avoid relying on outdated examples of available maturities when selecting a specific security. For a current investment, confirm the offering or trade confirmation.

How to answer Series 65 questions

Bills are short-term and generally sold at a discount or par, paying face value at maturity. Notes and bonds have longer maturities and pay interest semiannually. Use the term and cash-flow information stated in the question.

If market yield exceeds a fixed coupon, a note or bond generally trades below par; if yield is below coupon, it generally trades above par, all else equal. Remember that price and yield move inversely. Coupon rate is not total return or yield to maturity.

For a bill calculation, follow the stated discount convention and distinguish face-value discount from return on purchase price. For suitability, match maturity and liquidity to the client's objective. Treasury credit quality does not eliminate interest-rate, inflation, reinvestment, or price risk.

Sources

U.S. TreasuryDirect, Treasury Marketable Securities, Glossary for Treasury Marketable Securities, and Understanding Pricing and Interest Rates; NASAA Series 65 Test Specifications, Section I. Numerical examples are hypothetical.