Treasury Note

What Is a Treasury Note?

A Treasury note is a debt security issued by the U.S. Department of the Treasury. When you buy one, you are lending money to the federal government. In return, the note pays a fixed coupon rate of interest, usually every six months, and returns its par value when it matures. Treasury notes have original maturities of two, three, five, seven, or ten years. Longer-term government debt is called a Treasury bond, and shorter-term debt is called a Treasury bill.

How Treasury Notes Work

The Treasury sells new notes through regular auctions. Investors can also buy them through banks, brokers, or TreasuryDirect, the government's online platform. Once issued, notes trade in the secondary market. An investor who sells before maturity receives the prevailing market price, which can be above or below par. Prices and yield move in opposite directions. When market interest rates rise, the price of an existing note generally falls, and when rates fall, its price generally rises.

Interest from Treasury notes is subject to federal income tax but is exempt from state and local income taxes.

An Example

Suppose you hold a note with a $1,000 par value and a 4% coupon rate. It would pay $20 every six months, or $40 per year. At maturity, you would receive your final interest payment along with the $1,000 principal. This example is hypothetical and does not reflect any current rate.

Why They Matter to Investors

Treasury notes are backed by the full faith and credit of the U.S. government, so they are widely regarded as having very low credit risk. Their main risk is interest rate risk. A holder who sells before maturity may take a loss if rates have risen since the note was bought. Fixed payments can also lose buying power if inflation rises. Because they are considered very secure, Treasury notes are often used as a reference point when comparing other investments.