Differences Between Treasury Bills, Notes, and Bonds

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Investors who pay attention to the financial media will often hear three different terms as it relates to government bonds: Treasury bills, Treasury notes, and Treasury bonds. The securities are similar in that all are issued by the United States to fund its debt, and all are backed by the full faith and credit of the U.S. government. There are two key differences between the three types of U.S. Treasuries, however: their maturity dates and the way that they pay interest.

How Treasury Securities Work

First, let’s look at the difference in the maturities of the three types of Treasury securities. Treasury bills (or “T-bills”) are short-term bonds that mature within one year or less from their time of issuance. T-bills are sold with maturities of four, 13, 26, and 52 weeks, which are more commonly referred to as the one-, three-, six-, and 12-month T-bills, respectively. The one-, three-, and six-month bills are auctioned once a week, while the 52-week bills are auctioned every four weeks. Since the maturities on Treasury bills are so short, they typically offer lower yields than those available on Treasury notes or bonds.

Treasury notes are issues with maturities of one, three, five, seven, and 10 years, while Treasury bonds (also called “long bonds”) offer maturities of 20 and 30 years. In this case, the only difference between notes and bonds is the length until maturity.

The 10-year is the most widely followed of all maturities; it is used as both the benchmark for the Treasury market and the basis for banks’ calculation of mortgage rates. Typically, the more distant the maturity date of the issue, the higher the yield.

How the Three Types of Securities Pay Interest

The other key difference is the way Treasury bills pay interest.

Like a zero-coupon bond, T-bills are sold at a discount to par. This discount is determined at the auction. “Par” is $100, or the value at which all T-bills mature. For instance, an investor could pay $98 for a bill that will eventually mature at $100. The $2 difference between the auction price and the maturity price represents the interest on the T-bill. The New York Federal Reserve Bank’s website provides a of how to calculate the effective yield of a T-bill based on its price and time until maturity.

In contrast, both Treasury notes and bonds pay a traditional “coupon,” or interest payment, every six months. When these securities are auctioned, they may sell at a price that translates to a yield to maturity higher, or lower, than that of the coupon.

TreasuryDirect, the website offered by the U.S. Treasury to enable investors to buy government bonds directly, .

What Kind of Price Fluctuations Can You Expect?

Once T-notes and T-bonds are issued, their prices fluctuate, so their yields remain linked to market prices. For example, say the government issues a 30-year bond with a yield of 10% when interest rates are high. In the next 15 years, prevailing rates fall significantly, and new long bonds are being issued at 5%.

Investors will no longer be able to buy the older T-bond and still receive a yield of 10%; instead, its yield to maturity will fall, and its price will rise. In general, the longer the time there is until the bond matures, the greater price fluctuation it will experience. In contrast, T-bills experience very little in the way of price fluctuation since they mature in such a short amount of time.

In short, there are only a few differences between the various types of Treasury securities. Still, these are important differences that it pays to understand for those considering an investment in government bonds.

Additional Information:

Using Treasuries for Diversification

The Risks of Treasuries

The History of U.S. Treasury Yield Movements