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What is a Treasury Note?

Beth Fontaine
Beth Fontaine

A treasury note, otherwise known as a T-Note, is a type of security issued by the United States government for the sole purpose of funding the national debt. It is a very popular form of investment because it is considered "risk-free". This is because debt and interest can be paid off through other factors, such as a changing economy, raising taxes, printing more money and reducing government spending. Simply put, the U.S. stands such a low risk of upheaval that purchasing securities from the U.S. Department of the Treasury is generally considered a sound strategy.

T-Notes, one of four types of government securities, are issued in 2, 5 and 10-year terms. Interest is earned at a fixed rate and in six-month increments until maturity is reached. The interest rate is also referred to as the yield, or the coupon rate. T-Notes are taxed federally, but not locally or by the state. For example, if an investor purchases a $5,000 US Dollars (USD) two-year treasury note with a yield of 4.5 percent, the investor will receive a payment of $225 USD every six months. When the loan matures, the investor can redeem it for $5,000 USD.

Woman with hand on her hip
Woman with hand on her hip

Sold in increments of $100 USD, the T-Note's true value isn't directly proportionate to its face value, but rather the market and its yield. Minimum investment is $1,000 USD and can go up to $1 million USD. In noncompetitive bidding, the limit is $5 million USD, or up to 35% of the initial offering at auction.

The yield of a treasury note is determined during auction purchase. In a noncompetitive bid, one accepts the yield given at the auction. A competitive bid allows the buyer to specify the yield he or she is willing to accept, but the bid isn't guaranteed to be accepted.

One may purchase a treasury note from the government, a bank or a broker. The consumer may hold on to it or sell before maturation. When a treasury note matures, the consumer is paid for the T-Note's face value.

Before buying a treasury note, you should determine whether you will be doing so competitively or noncompetitively. Competitive bids can only be purchased through a bank and broker, not the government, which only takes noncompetitive bids. Banks and brokers accept noncompetitive bids, however.

To buy directly from the government, one must open an account at TreasuryDirect (individuals only) or Legacy Treasury Direct. Bidding is carried out online.

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