Unlocking Treasury Securities: Your Guide to T-Bills, T-Notes, Bonds

Treasury securities are government debt instruments issued by the U.S. Department of the Treasury to finance government spending. These instruments are critical components of financial markets and a safe haven for investors. In this article, we delve into Treasury Bills, Notes, Bonds, and Treasury Inflation-Protected Securities (TIPS)—essential topics for the FINRA Securities Industry Essentials® Exam.

Treasury Bills (T-Bills)

What Are Treasury Bills?

Treasury Bills are short-term securities maturing in one year or less. They are sold at a discount from their face value, and investors earn the difference as interest when the bill matures.

Real-World Example

Imagine purchasing a T-Bill for $960. Upon maturity, the government pays you the full $1,000 face value, resulting in a $40 interest gain.

Visual Aid

    gantt
	  title Treasury Bill Lifecycle
	  dateFormat  YYYY-MM-DD
	  section T-Bill
	    Purchase at Discount: 2024-01-01
	    Maturity at Face Value: 2024-12-31

Key Takeaways

• Maturity: Less than a year.
• Risk: Low, backed by U.S. government.
• Interest: Difference between purchase price and face value.

Treasury Notes (T-Notes)

What Are Treasury Notes?

Treasury Notes mature between two and ten years, paying semi-annual interest at a fixed rate until maturity.

Real-World Example

Consider buying a 5-year T-Note that pays 3% interest annually. It disburses this interest in two halves each year.

Key Takeaways

• Duration: Mid-term, between 2 and 10 years.
• Interest Rate: Fixed and paid semi-annually.

Treasury Bonds (T-Bonds)

What Are Treasury Bonds?

Treasury Bonds mature in more than ten years and provide fixed-rate interest every six months until they reach maturity.

Real-World Example

An investor purchases a 30-year T-Bond with a 4% annual interest rate, receiving semi-annual payments over the three decades.

Key Takeaways

• Maturity: Long-term, over ten years.
• Uses: Ideal for long-term financial goals.

Treasury Inflation-Protected Securities (TIPS)

What Are TIPS?

TIPS are unique securities with principal values adjusted based on inflation (CPI). They protect investors from purchasing power erosion.

Real-World Example

If inflation raises the CPI by 2%, a $1,000 TIPS principal becomes $1,020.

Visual Aid

    graph TD;
	    A(TIPS Purchase $1000) --> B{CPI increase 2%}
	    B --> C(TIPS adjusted $1020)

Key Takeaways

• Adjustment: Principal rises with inflation.
• Benefit: Protects long-term investment value.

Safety and Taxation of Treasury Securities

Safety

Treasury securities are deemed among the safest investments, as they are fully backed by the U.S. government, which is unlikely to default.

Taxation

While interest from these securities is exempt from state and local taxes, it is subject to federal income tax.

Key Takeaways

• Reliability: Very safe, supported by U.S. government credit.
• Taxes: Free from state/local taxes but federally taxed.

Glossary

• CPI (Consumer Price Index): Measures changes in the price level of a market basket of consumer goods and services.
• Face Value: The principal amount of a security payable at maturity.
• Interest: Compensation for the lender from the borrower, typically in the form of periodic payments.

Additional Resources

• Books: “The Bond Book” by Annette Thau
• Websites: U.S. Department of the Treasury
• Online Resources: Investopedia’s Treasury Securities tutorials

Interactive Quizzes

These interactive quizzes and resources aim to bolster your understanding of Treasury securities for a well-rounded preparation for the SIE exam.