Part 1: What is a Treasury Note, How T-Notes Work, Why are T-Notes Important
Part 2: Pros & Cons of Investing in Treasury Notes, Should You Invest in T-Notes
Introduction to Treasury Notes for Kids and Teens
This video explains the concept of treasury notes in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about t-notes, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Kindergarten
- Elementary School
- Middle School
- High School
The topics covered are:
- What is a Treasury Note
- How Do Treasury Notes Work
- Why are T-Notes important
- What are the advantages of investing in Treasury Notes
- What are the disadvantages of investing in Treasury Notes
- Should you invest in T-Notes
What is a Treasury Note?
A Treasury Note, or T-Note, is a medium-term debt security issued electronically by the U.S. government.
When you buy a T-Note, you lend money to the US government for a specific amount of time – between 2 and 10 years.
During this time, the government pays fixed interest or coupon every six months, making it a perfect investment for anyone looking for regular income.
How Do Treasury Notes Work?
T-Notes can be bought directly from TreasuryDirect.Gov during an auction, through your existing bank account or brokerage account, or from the secondary market.
In treasury direct auctions, you can buy T-Notes through a competitive bid where you decide your desired yield, or non-competitive bids where you accept the market yield.
You can also purchase a collection of T-Notes through mutual funds or ETFs if you want easy diversification of your portfolio.
T-Notes need a minimum investment of $100, and can be bought in increments of $100. Each note has a face value or par value, usually $1,000, and pays a fixed interest every 6 months until maturity.
The interest from T-Notes is exempt from state and local income taxes, although you still have to pay federal income tax.
At maturity, you will get back the original face value. If you decide to sell it before maturity, you can do so in the secondary market – but the price you get depends on current interest rates, inflation and changes in supply and demand.
Let’s say you buy a 5 year T-Note with a face value of $1,000 and 3% interest.
You’ll receive $15 interest every 6 months (that’s $30 per year) for the next 5 years. And at maturity, you will get your $1,000 investment back.
Why are T-Notes important?
The yield on T-Notes, especially the 10 year T-Note, serves as a benchmark for other interest rates, like mortgages, corporate bonds, and savings accounts.
When T-Note yields rise or fall, it often has a ripple effect across the financial markets.
What are the advantages of investing in Treasury Notes?
T-Notes are backed by the full faith and credit of the U.S. government, meaning there is no risk of losing your investment due to default.
They provide regular predictable income. They are also liquid, which means you can easily buy or sell them in the secondary market.
They have a low minimum investment of just $100 and can help diversify your portfolio and reduce risk. Also T-Notes hit that sweet spot where they have higher yield than T-Bills but are less risky than T-Bonds.
Lastly, the interest earned from T-Notes is exempt from state and local income taxes.
What are the disadvantages of investing in Treasury Notes?
Since T-Notes are very low-risk investments, they also have far lower returns than riskier options like corporate bonds or the stock market.
And like other fixed income securities, T-Notes are subject to interest rate risk: if you need to sell your T-Note before maturity and the interest rates have risen, you might lose money.
Also, it’s possible to actually end up losing purchasing power if the rate of inflation is higher than the T-Note’s interest rate. Lastly, federal income tax still applies to the interest earned.
Should I invest in T-Notes?
Treasury Notes are a great choice for medium-term investors who are looking for steady, reliable income through a risk free investment with high liquidity.
For instance, if you’re approaching retirement or saving for your child’s college education that’s 5-7 years away.
But if you are investing for a longer term and are okay with more risk, alternatives like corporate bonds or the stock market are better since they’ll give you far higher profits over the long term.