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Treasury Securities

See Also:
Fixed Income Securities
Zero Coupon Bonds
What is Inflation?
Coupon Rate Bond
Non-Investment Grade Bonds (Unsecured Debentures)

Treasury Securities Definition

Treasury Securities consist of debt instruments issued by the U.S. government by the Bureau of Public Debt. Therefore, the market for these instruments is very liquid. Oftentimes, consider them to be basically risk free. This is because the United States Government backs them by the good faith.

Treasury Securities Explained

Treasury securities, as said above, are very liquid and essentially risk free. The U.S. government sells them at treasury securities‘ auctions. A treasury security auction is generally held a week after the announcement for a new issuance of securities. There is also a large secondary market for them where they are traded on a day to day basis. Rates vary from instrument to instrument, and are generally in relation to a treasury security’s maturity. There are currently four types of these instruments. See the following instruments listed from most liquid to least as well as shortest maturity to the longest maturity:

1) Treasury Bills (t bills)

2) Treasury Notes (t notes)

3) Treasury Bonds (t bonds)

4) Treasury Inflation Protected Securities (TIPS)

Note: There is one more type of security that exists from stripping the coupons and principal away from the treasury security as a whole. They are also known as Treasury STRIPS.


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Treasury Notes

See Also:
Treasury Securities
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

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