10-Year Treasury Note Options

10-Year Treasury Note Options
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When the federal government seeks to borrow money, it can do so by issuing 10-year Treasury notes. Investors and issuers alike face options that affect the performance of these debt securities. Although Treasuries are issued by the U.S. government and there is not much of a chance for default, there are other risks tied to the interest rate and price for Treasuries. Issuers can determine the timing for selling Treasuries, and investors can decide the ideal markets in which to trade.


A primary feature of a 10-year Treasury note option is the duration of the contract. Trasury notes can expire after one year from the issue date or continue to pay interest for up to a decade, depending on the maturity date. A fixed interest rate is attached to the 10-year note, which determines the borrowing rate for the government and the yield for investors. Investors can buy 10-year Treasury notes in increments of $100, according to the Treasury Direct website, and they receive interest distributions twice per year.


When interest rates are low, the government can borrow money cheaply. In 2011, even after debt rating agency Standard & Poor's lowered the credit rating of the U.S. government, 10-year note interest rates fell to lower levels, according to "Forbes." Low rates benefit the borrower because less money is required to repay the loans. In August 2011, billions of dollars in 10-year Treasury notes were sold at a new low of 2.14 percent.


Investors can buy and sell 10-year Treasury notes in futures markets. Buyers and sellers of futures contracts accept limits on the value at which notes can be bought or sold. A buyer who is concerned that the price for 10-year Treasury notes will escalate can invest in a futures contract with a price already attached to the security. The investor can buy the security later for that price regardless of where interest rates are trending. A seller can secure a price at which the Treasury can be sold at a future date, to protect against rising interest rates and falling prices.


A bond contract could have a provision that allows the issuer to call 10-year Treasury notes back before the maturity date, according to Fidelity Investments. One reason could be to capitalize on lower interest rates. The possibility that a bond will be called early increases the risk to investors, because interest payments would be truncated. So the interest rates on callable notes tends to be higher than the rate on other Treasuries, according to the Investing In Bonds website.