A 10-year Treasury note is a type of U.S. Treasury security sold in order to finance federal debt. Treasury notes mature in more than one year, but not more than 10 years. In this way, notes differ from Treasury bills, which are short-term securities of less than one year. Notes can be purchased in the public securities market, or at federally operated auctions. The maturity date, yield and interest-rate coupon amount – along with an investor’s goals and resources – affect the prices at which 10-year notes are sold.
Notes vs. Other Treasury Securities
U.S. securities include Treasury notes, Treasury bills – often called T-bills – T-bonds and Treasury Inflation-Protected Securities (TIPS). Notes and T-bonds pay interest to holders every six months, paying the face value of the security upon maturity. Unlike notes, bonds mature after a time period of more than 10 years, and normally are sold in large increments – $100,000 or more – and to financial institutions.
Treasury bills are short-term debt instruments that mature less than one year from the issue date. Investors buy T-bills for less than face value, and the interest paid equals the difference between the purchase price and the par value at maturity. A 26-week, $10,000 T-bill purchased for $9,500 would earn $500 in interest when it matures. TIPS pay interest semi-annually, with the principal value adjusted for inflation according to the Consumer Price Index.
U.S. savings bonds, unlike other types of securities, cannot be redeemed by anyone other than the registered owners. In other words, savings bonds cannot be transferred or sold on public securities markets or at auction. Savings bonds also are issued in both paper and electronic forms, whereas T-notes, T-bonds, T-bills and TIPS are provided only electronically. Treasury notes, bills, bonds and TIPS can be purchased for a minimum of $100, while U.S. savings bonds are sold in increments of $25.
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Treasury notes are issued with future maturity dates of two, three, five, seven and 10 years, and are issued in increments of $100. Purchase prices and interest rates are determined at auction and the price can be more than, less than or equal to the face value, or par amount, of a note. Being a fixed-rate security, a Treasury note’s price depends on its yield-to-maturity ratio and interest rate.
For example, if the yield-to-maturity ratio is less than the interest rate, the purchase price will be more than par. If the yield to maturity is greater than the interest rate, the purchase price will be less than face value, and if it equals the interest rate, the note price will be equal to par.
The actual formula, as provided by TreasuryDirect, is A = P x r [( d / t )/2], where A = accrued interest, P = face value, r = interest rate of a Treasury note, d = the number of days since the last coupon payment, and t = the number of days in the current coupon period.
How to Buy Notes
Treasury notes can be purchased through a private securities broker, government securities dealer, a bank or other financial institution, or through TreasuryDirect. All Treasury securities are issued in what’s called the book-entry method, where entries are recorded in a central ledger. These entries can be conducted through commercial-bank form with your bank or broker. It is a multi-tier system involving the Treasury Department, the Federal Reserve, banks, brokers and other financial institutions. TreasuryDirect is an online system through which Treasury purchases can be made. Auction dates are published through various outlets, including lenders, brokers, dealers, TreasuryDirect and the Federal Reserve.