Treasury Note Definition Examples Features Importance

Treasury Note Definition

Features

These are for a fixed durationDurationDuration is a risk measure used by market participants to measure the interest rate sensitivity of a debt instrument, e.g. a Bond. It tells how sensitive is a bond with respect to the change in interest rates. This measure can be used for comparing the sensitivities of bonds with different maturities. There are three different ways to arrive duration measures, viz. Macaulay Duration, Modified Duration, and Effective Duration.read more.These are riskless securities.There is also a regular payment of returns in the form of interest.The returns earned are tax-free, i.e., exempt from tax.

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Example of Treasury Note

Let us take an example.

Suppose Mr. A has invested in the government scheme of Treasury notes which is as follows: –

Period of investment = 2 yearsRate of interest = 12% p.a.Amount invested = $1,000,000Interest due and payable = every 6 monthsDate of investment = 01.04.2020Date of maturity = 31.03.2022

Mr. A will pay the maturity amount along with the prior interest.

Solution:

First, we have to calculate the half-yearly rate of interest, the rate of interest for six months, which is as follows: –

Half-Yearly Rate = 12% * 6 months / 12 months = 6%.

The amount of interest to be received on investment at the end of every six months will be: –

Amount of interest to be received on investment at the end of every six months = Amount invested * Rate of interest.

Amount of interest to be received on investment at the end of every 6 months = $1,000,000 * 6% = $60,000.

Amount to be received at last installment will be: –

Amount to be received at last installment = 1,000,000 + 60,000 = $1,060,000.

In the above example, Mr. A will receive a four-installment of half-yearly interest of $60,000 and a sum of $1,000,000 at the time of the last interest payment as maturity valueMaturity ValueMaturity value is the amount to be received on the due date or on the maturity of instrument/security that the investor holds over time. It is calculated by multiplying the principal amount to the compounding interest, further calculated by one plus rate of interest to the period’s power.read more.

How to Buy a Treasury Note?

There are two options to invest in such securities, which are as follows: –

Investment through a broker, bank, or any authorized intermediary will do all the legal formalities on our behalf and charge some amount as commission or service charges.The other option is to buy on your own by getting registered ourselves on the securities market portal or, say, by opening a trading account, then by placing a bid for purchase and adding the amount of investment in such a trading account through which the exchange will deduct the due sum and allot us the units purchased.

Investing in Treasury Note

As they are the safest option to invest by a fresher or even by an expert, the main drawback is that it gives us the return, which is quite lower than other investment options available in the market. As the investments are made for such a long span, if the investor has better opportunities or needs funds, they cannot withdraw without paying requisite prematurity charges. The amount invested is not subjected to capital appreciationsCapital AppreciationsCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more or losses; only the principal amounts are fixed.

Importance of Treasury Note

The fund’s manager who is managing the funds also needs such type of investments that are risk-free and will earn a fixed rate of interest, so to fulfill that part of the investment, this is the most considered option which the investors choose as the government itself issues it, so it is also considered as the risk-free safest investments by the investor.

Treasury Note vs Treasury Bill

Usually, treasury notes have a maturity period from one to ten years, but on the other hand, Treasury billTreasury BillTreasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government.read more has a maturity period of less than a year.Treasury notes are issued at face value, but on the other hand, one may also give Treasury bills at a discount.The investment in Treasury notes must be from the spare funds that are not required for such a long time, but investments in Treasury bills could be short-term, which earns short-term profits.

Advantages

As it carries a fixed interest rateFixed Interest RateA fixed interest rate is a constant rate of interest levied on debts like loans, mortgages, or bonds.read more payable every six months, one can easily plan its income and expenses accordingly.`Receiving interest from such a Treasury note will be tax-free or exempt from taxExempt From TaxTax-exempt refers to excluding an individual’s or corporation’s income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only.read more.It allows the investor to quote its required rate of interest, which might get approved.

Disadvantages

As it allows the investor to quote its rate of return, it will cost more to the government on approval.The investor has to wait so long to get the invested amount as the duration of such a scheme is too long.It will unnecessarily cost the investor to redeem their investment before maturity.

Conclusion

To conclude, the term ‘Treasury note’ is considered the best option to start your trading or if in the learning phase as the principal amount invested is 100% secured and will also earn a fixed interest rate. The trading is on the online platform, so there is no intermediary. All facilities can be self-accessed and used by logging into our account, including purchasing and redeeming investments.