Investing, Notes and bonds

What is a treasury note?

October 3, 2023

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Treasury note: what the heck is it?

You probably heard of or read about treasury notes from business media. Some of you may wonder what it is. A Treasury Note is often referred to simply as a “T-Note“. It is a debt security issued by the United States Department of the Treasury.

It is a fixed-income investment instrument that represents a loan to the U.S. government. Treasury Notes are considered one of the least risky investments in the world as they are backed by the full faith and credit of the U.S. government. It simply means that the U.S. government pledges to repay the principal amount along with interest.

Here is an example of a treasury note from Wikipedia

In reality, T-notes are a mechanism by which the U.S. government takes money out of the economy or the private sector.

What are some key characteristics of Treasury Notes?

Maturity: Treasury Notes have fixed maturity dates that can range from 2 to 10 years, although the most common maturities are 2, 3, 5, and 7 years. This means that when you purchase a T-Note, you are lending money to the U.S. government for the specified duration.
Interest Payments: T-Notes pay interest semiannually, typically at a fixed rate determined at the time of issuance. The interest income is exempt from state and local taxes, which makes it attractive to investors seeking a stable income stream.
Liquidity: Treasury Notes are highly liquid investments. They can be bought and sold on the secondary market before their maturity date, and their prices can fluctuate based on changes in interest rates.
Safety: T-Notes are considered one of the safest investments because they are backed by the U.S. government, which has the power to tax and print money to meet its obligations.
Minimum Investment: Treasury Notes are available in various denominations, but they are typically sold in increments of $100. This makes them accessible to a wide range of investors.
Marketability: Treasury Notes are actively traded in the financial markets, and their prices are influenced by changes in interest rates, economic conditions, and investor sentiment.Investors often use Treasury Notes as a way to preserve capital or generate a steady stream of income. It is also a way to diversify their investment portfolios. T-notes are particularly popular among risk-averse investors and institutions seeking a safe haven for their funds.

Does the interest rate of a treasury note change over time?
The answer is no. The interest rate of a Treasury Note does not change over its term. When you purchase a T-note, you receive a fixed interest rate that remains constant throughout the life of the note. This fixed interest rate is determined at the time of issuance and is one of the key characteristics of Treasury Notes.
For instance, if you buy a 2-year Treasury Note with a fixed interest rate of 2%, you will receive interest payments equal to 2% of the face value of the note each year for the duration of the 2-year term. This fixed rate provides investors with predictability and stability in terms of the interest income they will receive from the investment.
It’s important to note that while the interest rate on the Treasury Note remains fixed, the market price of the note can fluctuate on the secondary market based on changes in prevailing interest rates. When market interest rates rise, the prices of existing fixed-rate bonds and notes tend to fall, and vice versa. However, if you hold the Treasury Note until maturity, you will receive the face value of the note along with all the interest payments as originally contracted.

Your next question could be: Where can I buy a treasury note?

You can buy Treasury Notes and other U.S. Treasury securities through a variety of channels such as:

TreasuryDirect: This is the official website of the U.S. Department of the Treasury, and it allows individual investors to purchase, manage, and hold Treasury securities online directly from the U.S. government. You can open an account on TreasuryDirect and buy Treasury Notes and other Treasury securities directly from the source.
Financial Institutions: Most banks, credit unions, and brokerage firms offer Treasury Notes and other Treasury securities to their customers. You can check with your bank or brokerage to see if they provide access to Treasury securities. They can assist you in purchasing and managing these investments.
Online Brokerage Accounts: Many online brokerage platforms also offer the ability to buy and manage Treasury Notes. You can open an online brokerage account with a platform like Fidelity, Charles Schwab, E*TRADE, TD Ameritrade, or others, and then purchase Treasury Notes through your brokerage account.
Treasury Bills and Bonds Auctions: The U.S. Treasury conducts regular auctions for Treasury securities, including Treasury Notes. You can participate in these auctions through the TreasuryDirect website or, in some cases, through your brokerage account if they offer access to Treasury auctions.
Secondary Market: If you’re interested in purchasing Treasury Notes that are already issued and trading on the secondary market, you can do so through a brokerage account. The prices of these securities can fluctuate based on market demand and interest rate changes.

When buying Treasury Notes, you’ll need to provide the necessary personal and financial information, as well as funds to cover the purchase. Be sure to compare fees and commission rates if you are using a brokerage, as costs can vary among different service providers. Additionally, it’s a good idea to consider factors like the maturity date and interest rate of the Treasury Notes to align with your investment goals. More articles on investing can be found here.