TIPS – Treasury Inflation Protected Securities
Treasury Notes Definition
The treasury notes definition, also known as t notes, is a U.S. government debt security that is generally intermediate in terms of its maturity. T notes generally have a maturity of one to ten years, and pay coupons as well as principal when they mature, just like regular corporate bonds.
Treasury Notes (t Notes) Explained
A Treasury Note is an intermediate term security that the government issues into the fixed income market. Because treasury notes are a government security it is essentially a risk free instrument, but because of the t-notes intermediate life it has a higher interest rate than that of the t bill, but less than that of the t bond. The t-note is fairly liquid in the markets and is sold in denominations of $1,000 or more for one to ten years.
Treasury Note Formula
The treasury note formula is similar to that of the t-bill formula, but different because a treasury note contains coupons or interest payments. It should be noted that the t-note formula is the same as for a treasury bond. Treasury note rates, current price, coupons, as well as the face value can all be derived and calculated using the following formula:
Current Price of Note = ∑ coupon payment + principal payment
(1+YTM)# years (1+YTM)# years
Treasury Note Example
Let’s look at a treasury note example. Lumber Co. purchases a newly issued 5-year, $1,000 t-note with a YTM of 5%. The note also pays an 4% coupon on an annual basis. The note will mature in 5 years. What is the current price of the treasury note when it is issued to Lumber Co.?
Using the formula above the price can be calculated as follows:
($40/(1+.05)1) + ($40/(1+.05)2) + ($40/(1+.05)3) + ($40/(1+.05)4 + ($40/(1+.05)5) + $1,000/(1+.05)5) = $956.71