Treasury bills, notes, and bonds
Also known as: treasury securities, treasuries, US government securities
Treasury bills, notes, and bonds are debt securities issued by the US government and backed by its full faith and credit. They differ mainly by maturity: bills mature in one year or less, notes in two to ten years, and bonds in twenty to thirty years.
Treasury securities are the marketable debt of the US federal government, issued to fund its operations and backed by the government's full faith and credit. Because default risk is considered negligible, Treasuries serve as the benchmark "risk-free" investments against which other securities are measured. They are sold at regular auctions and trade actively in the secondary market.
The three main types differ by maturity and structure. Treasury bills (T-bills) mature in one year or less and pay no coupon; instead, they are sold at a discount to face value, with the investor's return being the difference between the purchase price and the amount received at maturity. Treasury notes (T-notes) mature in two to ten years, and Treasury bonds (T-bonds) in twenty to thirty years — both pay fixed interest semiannually and return face value at maturity. Notes and bonds are quoted in 32nds of a point, a quoting convention exams like to test.
Interest on all Treasuries is subject to federal income tax but exempt from state and local tax. While Treasuries carry minimal credit risk, they are still exposed to interest rate risk — long-term bonds especially — and to inflation eroding fixed payments. Related products include cash management bills (very short-term), STRIPS (zero-coupon securities created by separating a note or bond's payments), and TIPS (inflation-protected securities).
Treasury securities appear across securities licensing exams: the Series 7 and Series 6 test the maturities, discount pricing of bills, quoting conventions, and STRIPS, while the Series 65 covers Treasuries as investment vehicles and notes that agents selling only US government securities may qualify for registration exclusions.
Key takeaways
- Treasury bills mature in one year or less and are sold at a discount instead of paying a coupon.
- Treasury notes mature in two to ten years; Treasury bonds mature in twenty to thirty years; both pay semiannual interest.
- All Treasuries are backed by the full faith and credit of the US government, making them the benchmark risk-free asset.
- Treasury interest is federally taxable but exempt from state and local income tax.
- Notes and bonds are quoted in 32nds — a detail frequently tested on the Series 7.