 Personal Finance Powerpoint Presentation, Treasury Note, prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Treasury Note, which you can find online. Take a look at the references, resources, continue your research from there. This by the Investopedia team, updated December 29, 2021. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools. In mind, we're now asking the question, what's a Treasury Note? A Treasury Note, T Note for short, is a marketable U.S. government debt security with a fixed interest rate and a maturity between 2 and 10 years. Let's go through that one more time. We're looking at the Treasury Note or T Note, a marketable U.S. government debt security. So we're looking at a fixed income type of investment. In essence, we can think of it as a loan to the government in exchange for the Treasury Note. And for us loaning to the government, we would expect then to get a rate of return, which is interest, which is kind of like the rent on the money that we're loaning to the government in a similar way that if we were to rent property, for example, we might have the payment of the rent on it here. We have the use of the money, which we're receiving interest for that use of the money. We would expect it to be a secure type of investments, given the fact that it's backed up or supported by the U.S. government, which you would expect to be paying back their obligations. If they weren't to pay back their obligations, that would be quite a problem. So we would expect to be quite secure, has a maturity between 2 and 10 years on the maturity. Okay, so Treasury Notes are available from the government with either a competitive or non-competitive bid. With a competitive bid, investors specify the yield they want at the risk that their bid may not be approved. With a non-competitive bid, investors accept whatever yield is determined at auction. Understanding Treasury Notes issued in maturities of 2, 3, 5, 7 and 10 years, Treasury Notes are popular investments and there is a large secondary market that adds to their liquidity. So notice they're a little bit longer term than, say, T-bills and therefore they might be traded on the secondary market. In other words, the primary market would be that we're buying it directly from the government and our money's going to the government and then we can have that bill, we could sell it or purchase the bills on the secondary market, which would be not primarily from the government in that sense. So that would be the secondary market. Interest payments on the Notes are made every six months until maturity. So when we think about the interest payments, you can kind of think about it like renting an apartment. You can usually pay the rent monthly in, say, an apartment, for example, with the interest payments on these type of notes, which is the rent on the loan that we basically gave out. It's every six months. So we have the interest payments basically every six months and then at the end of the maturity, then we get the initial amount back, kind of like giving the rental property back. We get our money back that we invested or, in essence, loaned. So the income for interest payments is not taxable on the municipal or state level, but is federally taxed similar to Treasury bond or a Treasury bill. Treasury notes, bonds and bills are all types of investments in debt issued by the U.S. Treasury. The key difference between them is their length of maturity. So when you look at these types of investments, you might say, well, they're quite similar. They are quite similar, but they have different lengths to maturity. For example, a Treasury bonds maturity exceeds 10 years and goes up to 30 years making Treasury bonds the longest dated sovereign fixed income security. Treasury notes and interest rate risk. The longer its maturity, the higher AT notes exposure to interest rate risk. So interest rate risk, remember, is the risk that the market interest rates basically go up while you're locked in to a fixed income type of arrangement. So in other words, if you have an arrangement where you're saying, I have, in essence, loaned the money for this particular investment and have a fixed return, that return something we negotiated at one point in time. And then after that, the market interest rates go up, then if you had the money, you could then invest it in other similar investments, possibly getting a higher return. But you can't do that because you've locked in to this particular investment. So that's going to be that type of risk that can happen. Obviously if you've locked in to the rate, a particular rate of return and the market rates go down, then that would actually be a good thing because now you've locked in to a higher rate of return. So in addition to credit strength, a note or bonds value is determined by its sensitivity to changes in interest rates. Most commonly, a change in rates occurs at the absolute level underneath the control of a central bank or within the shape of the yield curve. Moreover, these fixed income instruments possess different levels of sensitivity to changes in rates, which means that the fall in prices occurs at various magnitudes. This sensitivity to shifts in rates is measured by duration and expressed in terms of years. Factors that are used to calculate duration include coupon, yield, present value, final maturity, and call features. A good example of an absolute shift in interest rates occurred in December 2015 when the Federal Reserve, the Fed, raised the federal funds rate to a range of 25 basis points higher. At that time, it had been in the range of 0% to 0.25%, but then was changed to 0.25%. This increase in benchmark interest rates has had the effect of decreasing the prices of all outstanding U.S. Treasury notes and bonds. Special considerations in addition to the benchmark interest rate elements such as changing investors' expectations create shifts in the yield curve known as curve risk. This risk is associated with either a steepening or flattening of the yield curve, a result of altering yield among similar bonds of different maturities. For example, in the case of a steepening curve, the spread between short and long-term interest rates widens as the long-term rates increase more than the short-term rates. If the short-term rates were to be higher than any of the long-term rates, it would create a condition known as an inverted yield curve. Thus, the price of long-term notes decreases relative to short-term notes. The opposite occurs in the case of a flattening yield curve. The spread narrows and the prices of short-term notes decrease relative to long-term notes.