The difference between Treasury bills, notes, and bonds comes down to two things: how long the government keeps your money, and how you get paid. Bills mature in a year or less and are sold at a discount to face value, so your return is the gap between what you paid and what you get back. Notes mature in 2 to 10 years and bonds in 20 or 30 years, and both pay a fixed interest rate every six months until maturity.
Maturity Terms
Maturity is the biggest dividing line. It sets how long your money is tied up and, indirectly, how much price risk you take if you decide to sell early.
Treasury bills have the shortest terms, available in maturities of 4, 6, 8, 13, 17, 26, or 52 weeks.1TreasuryDirect. Treasury Bills That makes them a common place to park cash you expect to need within a year.
Treasury notes sit in the middle, with fixed terms of 2, 3, 5, 7, or 10 years.2TreasuryDirect. Treasury Notes They tend to attract investors who want regular interest payments without committing money for decades.
Treasury bonds are the longest-dated option, maturing in 20 or 30 years.3TreasuryDirect. Treasury Bonds Locking in a rate for that long appeals to people focused on predictable income far into the future, but your money is committed for a very long stretch.
How You Earn a Return
Bills and longer-dated securities pay you in fundamentally different ways.
Bills Are Sold at a Discount
Treasury bills pay no periodic interest. You buy them for less than face value and receive the full face value at maturity. The difference is your return.4U.S. Securities and Exchange Commission. Zero Coupon Bond Pay $9,800 for a bill with a $10,000 face value and you make $200. Nothing hits your bank account in the meantime.
Notes and Bonds Pay Interest Every Six Months
Notes and bonds both carry a fixed interest rate, called the coupon rate, and pay it every six months until maturity.5TreasuryDirect. Understanding Pricing and Interest Rates The coupon is set at auction and never changes. A 10-year note with a 4% coupon on a $10,000 investment pays $200 twice a year for a decade, then returns your $10,000.
The auction price may land exactly at face value, slightly above, or slightly below. When the auction yield is higher than the coupon rate, the price dips below face value; when the yield is lower, the price rises above it.5TreasuryDirect. Understanding Pricing and Interest Rates For most individual buyers the effect is small, but it explains why the purchase price is not always a round number.
How to Buy Them
The simplest route for all three is TreasuryDirect, the government’s free online portal. You open an account, link a bank account, and place a noncompetitive bid, meaning you agree to accept whatever rate the auction produces. In exchange you’re guaranteed to receive the full amount you requested.6TreasuryDirect. Buying a Treasury Marketable Security For most individual investors this is the right choice.
Competitive bids let you specify the exact rate you’ll accept, but if the auction clears below your rate you get nothing. Competitive bids have to go through a bank or broker.7TreasuryDirect. Treasury Bills In Depth
The minimum purchase is $100 for any Treasury security, with additional purchases in $100 increments.6TreasuryDirect. Buying a Treasury Marketable Security Noncompetitive bids are capped at $10 million per auction.8eCFR. 31 CFR 356.22 – Does the Treasury Have Any Limitations on Auction Awards?
Selling Before Maturity
You can sell any Treasury security on the secondary market through a bank, broker, or dealer instead of holding to maturity. If you bought through TreasuryDirect, though, you have to hold the security for at least 45 calendar days before transferring it out for sale. That rule makes it impossible to sell a 4-week bill bought through TreasuryDirect, because it matures inside the hold period.9TreasuryDirect. Selling a Treasury Marketable Security
The price you get depends on what interest rates have done since you bought. If rates have risen, newer securities pay more, and your older lower-rate security is worth less than face value. If rates have fallen, your security is worth more than face value.5TreasuryDirect. Understanding Pricing and Interest Rates This matters far more for a 30-year bond than for a 13-week bill, because a bond has decades of remaining payments to reprice while a bill has almost no time left for rates to move.
Hold to maturity and none of this matters. You get face value back regardless.
Tax Treatment
Interest earned on Treasury bills, notes, and bonds is subject to federal income tax but exempt from state and local income taxes.10Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation In a high-tax state, that exemption can make Treasuries’ after-tax yield noticeably better than a comparably rated taxable bond.
Reporting works differently by security. For bills, the “interest” is the discount you earned when the bill matured, reported in the year of maturity. For notes and bonds, you report each semiannual coupon payment as interest income in the year you received it. TreasuryDirect posts a 1099-INT at the start of each year.11TreasuryDirect. Tax Forms and Tax Withholding
Related Securities That Aren’t Bills, Notes, or Bonds
The Treasury issues two other marketable securities that people sometimes lump in with the big three. They aren’t the same product.
Treasury Inflation-Protected Securities (TIPS) come in 5-, 10-, and 30-year terms. They pay a fixed coupon every six months, but the principal itself adjusts with the Consumer Price Index. When inflation rises, the principal goes up and the interest payments grow with it. At maturity you receive the inflation-adjusted principal or the original face value, whichever is greater.12TreasuryDirect. Treasury Inflation-Protected Securities (TIPS)
Floating Rate Notes (FRNs) mature in two years and pay interest quarterly. The rate resets every week based on the most recent 13-week Treasury bill auction rate, plus a fixed spread set when the FRN was auctioned.13TreasuryDirect. Floating Rate Notes (FRNs) Payments move with short-term rates, which limits price swings compared with a fixed-rate note.
Both TIPS and FRNs share the $100 minimum and the state and local tax exemption.6TreasuryDirect. Buying a Treasury Marketable Security If your goal is inflation protection or a short commitment with periodic income, they’re worth a separate look; if you’re choosing among plain bills, notes, and bonds, the decision still turns on how long you want to lend and whether you’d rather earn a discount up front or a coupon every six months.