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Difference Between Treasury Bills and Notes

Treasury Bills vs Notes
 

Treasury bills and notes are both investment securities issued by the government in order to raise funds for the running of the government and to pay off any outstanding government loans. The major similarity between these securities is that they are issued by the same party, and any individual who purchases these securities is essentially lending money to their country’s government. Regardless of their similarities, treasury bills and notes are quite different to each other in terms of their characteristics. The following article offers a clear overview of what is each type of security is and provides a comprehensive explanation of how they are different to each other.

What is Treasury Bill?

Treasury bill is a short term security, with a maturity of usually less than one year. T-bills issued by the U.S. government is sold in denominations of the highest being $5 million, the lowest being a $1000, and in between with a number of other denominations. The maturity of these securities also varies; some mature in one month, three months and six months.

The return to an investor of a treasury bill is not from interest paid like in most bonds (interest on bonds are called coupon payments). Rather, the investment return is through the appreciation of the price of the security. For example, the price of a T-bill is set at $950. The investor pays the T-bill at $950 and waits for it to mature. At maturity, the government pays the bill holder (investor) $1000. The return that the investor would have made is the difference of $50.

What is Treasury Note?

Treasury notes are instruments that have a long term maturity and are issued up to 10 years. Treasury notes are paid coupon interest at 6 month intervals and the principal is repaid to the bond holder on the maturity date. Treasury notes also have an option at which the holder can sell the notes on the secondary market in case they want to exit their investment, providing the holder higher levels of flexibility.

Treasury notes are perfect for investors who are looking for an investment vehicle with a maturity that is not too long, and is not too short and requires an investment return to be paid on a regular basis.

Treasury Bills vs Treasury Notes

The major similarity between the two investment securities is that they are both issued by the government and, therefore, are very safe investment vehicles, since a country’s government does not default on its borrowing. However, since they are risk free assets, the interest paid for these types of investments are quite low.

Treasury notes and bills are quite different to each other in terms of their characteristics. While treasury bills are short term investments, treasury notes are of longer term. Treasury bills do not pay coupon interest, and the return is through price appreciation whereas the return for a treasury note is through the period coupon interest payments.

Summary

• Treasury bills and notes are both investment securities issued by the government in order to raise funds for the running of the government and to pay off any outstanding government loans.

• Treasury bill is a short term security, with a maturity of usually less than one year. Treasury notes are instruments that have a long term maturity and are issued up to 10 years.

• Treasury bills do not pay coupon interest, and the return is through price appreciation whereas the return for a treasury note is through the period coupon interest payments.


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