What Are Treasury Notes?

Treasury Notes or T-Notes, are fixed U.S. government debt securities governed by the Bureau of Public Debt (BPD). T-Notes typically have terms between two and 10 years and pay interest on a semi-annual basis. Treasury Note interest is only subject to federal tax and is state tax-free. As with most other U.S. treasuries, T-Notes are auctioned off to the public.

Two types of bids can be placed on Treasury Notes: competitive and non-competitive bids. Non-competitive bids are set up in such a way that in order for the bidder to get the note they desire for the full amount they want, they must accept what the yield for that auction is set at.

Competitive bids allow the investor to set the yield they are willing to accept with one of three results:

1. If your yield bid is less than the yield at the time of auction then your bid will be accepted for the full number of Notes requested.
2. If your yield bid is equal to the high yield then your bid may be accepted for less than the full amount of your order.
3. If your yield bid is higher than the yield set by the auction then your bid will be rejected.

Treasury Bonds can be issued to via a bank, broker, dealer or by using BPD operated, Treasury Direct. However, competitive bids can only be placed using a bank, broker or dealer.

Individual government T-Notes are issued in two, three, five, seven, and 10-year terms offered in multiples of $100.00. Price and rate are determined at the time of auction with the price of the note dependent upon its yield to maturity (YTM) in relation to the interest rate.

1. If the interest rate is greater than the YTM then the price will be greater than the par amount. This is a premium T-Note.
2. If the YTM and interest rate are equal then the price and par amount will be equal.
3. If the interest rate is less than the YTM then the price of the bond will be less than the par amount. This is a discount T-Note.

Recently, 10-year Treasury Note interest rates were set at 2.750% with a price of $99.411068. (02-17-09 Auction)

The interest earned on Treasury Notes is exempt from state and local taxes, however federal taxes must still be paid on interest paid. A 1099-INT form will be sent to you each year to file with your federal taxes.

Treasury Notes are a safe (if held to maturity), fixed, short-term investment for your money. You receive semi-annual interest from the government throughout the Note’s term and are only subject to federal taxes on the interest.

In addition, the option to resell your T-Note in the secondary market can offer you more profit under the right market conditions. This government security is a safe way to increase your funds to achieve your short-term goals.