A T-note, short for Treasury note, is a marketable U.S. government debt security that pays a fixed interest rate and matures between two and 10 years.
Understanding Treasury Notes (T-Notes) in Detail
Treasury notes are a common way for the U.S. government to borrow money. They are considered relatively safe investments because they are backed by the full faith and credit of the U.S. government.
Key Characteristics of T-Notes:
- Maturity: T-notes have maturities ranging from 2 to 10 years.
- Interest Payments: T-notes pay a fixed interest rate, known as the coupon rate, semi-annually (every six months).
- Marketable Security: T-notes can be bought and sold in the secondary market before their maturity date. This means you aren't locked into holding them until maturity.
- Denominations: T-notes are typically sold in denominations of \$100.
- Auction Process: The U.S. Treasury Department auctions T-notes to the public. Investors can submit either competitive or noncompetitive bids.
- Competitive Bids: Specify the yield the investor is willing to accept.
- Noncompetitive Bids: Guarantee the investor will receive the T-note at the yield determined by the auction.
- Taxation: Interest income from T-notes is subject to federal income tax but is exempt from state and local taxes.
How to Purchase T-Notes:
- TreasuryDirect: You can buy T-notes directly from the U.S. government through the TreasuryDirect website.
- Brokerage Account: You can also purchase T-notes through a broker.
Example:
Imagine you purchase a \$1,000 T-note with a 5-year maturity and a coupon rate of 3%. You would receive \$15 (3% of \$1,000 divided by 2) every six months for five years. At the end of the five years, you would receive your initial \$1,000 back.
Benefits of Investing in T-Notes:
- Safety: Backed by the U.S. government, making them a low-risk investment.
- Fixed Income: Provides a predictable stream of income.
- Liquidity: Can be easily bought and sold in the secondary market.
- Tax Advantages: Exempt from state and local taxes.
Risks of Investing in T-Notes:
- Inflation Risk: If inflation rises faster than the coupon rate, the real return on the investment decreases.
- Interest Rate Risk: If interest rates rise, the value of existing T-notes may fall.
In summary, a T-note is a relatively safe and liquid investment option offering fixed income and backed by the U.S. government, making it a popular choice for investors seeking stability.
