What are Treasury Bills, Treasury Notes, and Treasury Bonds?

what are treasury bonds

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How Treasury Securities Work

First, let’s look at the difference in the maturities of the three types of Treasury securities. Treasury bills (or “T-bills”) are short-term bonds that mature within one year or less from their time of issuance. T-bills are sold with maturities of four, 13, 26, and 52 weeks, which are more commonly referred to as the one-, three-, six-, and 12-month T-bills, respectively. The one-, three-, and six-month bills are auctioned once a week, while the 52-week bills are auctioned every four weeks.

Since the maturities on Treasury bills are so short, they typically offer lower yields than those available on Treasury notes or bonds.

Treasury notes are issues with maturities of one, three, five, seven, and 10 years, while Treasury bonds (also called “long bonds”) offer maturities of 20 and 30 years. In this case, the only difference between notes and bonds is the length until maturity. The 10-year is the most widely followed of all maturities; it is used as both the benchmark for the Treasury market and the basis for banks’ calculation of mortgage rates.

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Typically, the more distant the maturity date

of the issue, the higher the yield.

How the Three Types of Securities Pay Interest

The other key difference is the way Treasury bills pay interest. Like a zero-coupon bond. T-bills are sold at a discount to par. This discount is determined at the auction. “Par” is $100, or the value at which all T-bills mature. For instance, an investor could pay $98 for a bill that will eventually mature at $100. The $2 difference between the auction price and the maturity price represents the interest on the T-bill. The New York Federal Reserve Bank’s website provides a brief explanation of how to calculate the effective yield of a T-bill based on its price and time until maturity.

In contrast, both Treasury notes and bonds pay a traditional “coupon ,” or interest payment, every six months. When these securities are auctioned, they may sell at a price that translates to a yield to maturity higher, or lower, than that of the coupon.

In short, there are only a few differences between the various types of Treasury securities. Still, these are important differences that it pays to understand for those considering an investment in government bonds.

Source: bonds.about.com

Category: Bank

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