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Treasury Notes and Bonds 101

U.S. Treasury Notes (“T-notes”) are issued in two, three, five, and ten-year maturities. T-notes function like traditional semi-annual coupon bonds. For example, a T-note with a coupon rate of 8% and a $1,000 face value will pay a $40 coupon every six months until maturity.

Treasury Bonds (“Govies”) are usually issued in thirty-year maturities. Some Govies, issued prior to 1985, have call options. Like T-Notes, Govies function as ordinary coupon bonds.

T-notes and T-bonds trade at discounts or premiums depending on their coupon rates and lengths-to-maturity. The bid-ask spreads on T-notes and T-bills are extremely small because they trade in very large volumes.

The following chart details advantages and disadvantages of T-notes and T-bonds:

Treasury Notes and Bonds

Advantages
     • Considered Free of Default Risk
     • Liquid. Little Liquidity Risk
     • Exempt from state taxes
     • Minimum Face Value is $1,000

Disadvantages
     • Low Yield
     • Vulnerable to Interest Rate Risk
     • Vulnerable to Inflation Risk
     • Older Issues Vulnerable to Event and Call Risk

Questions:

1. Treasury Notes are issued in what maturities?

2. Describe the advantages and disadvantages of T-Notes and Govies?

Answers:

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