Treasury Bills, Notes, Bonds, and TIPS

The United States government issues four types of debt that it backs with its full faith and credit taxing powers. They are called treasury bills, treasury notes, treasury bonds, and treasury inflation protection securities. These terms are often used interchangeably, but have differences in terms of interest payment and duration. Below, I outline the difference between the types of debt instruments offered by the United States:

What Are Treasury Bills?

Treasury Bills are the shortest form of debt issued by the United States government. In terms of duration, they are frequently sold in maturity increments of 13 weeks, 26 weeks, and 52 weeks, though the only technical requirement is that a T-Bill duration must be one year or shorter. Treasury bills are sold in increments ranging from $1,000 to $5,000,000. You do not collect interest payments, but instead, treasury bills sell at a discount below par and this represents your return. If you pay $980 for a $1,000 treasury bill with a one-year duration, you get to reap a $20 gain in exchange for lending the United States your money for a year.

What Are Treasury Notes And Treasury Bonds?

Treasury Notes are sold in maturity increments that range between one and ten years. With Treasury Notes, you do not have to wait until maturity to reap a gain. Instead, the Treasury Note makes interest payments every six months. A Treasury Bond is the same thing as a Treasury Note except is sold over a longer duration period of ten to thirty years.

What Are Treasury Inflation-Protection Securities?

Treasury Inflation Protected Securities are U.S. debt that averages in duration of 8.1 years (you can choose specific increments that are longer or shorter than this). Instead of receiving a fixed interest rate that is chosen at the outset, the interest payment that you collect is regularly updated according to a consumer price index maintained by the government. The interest payments arrive every six months. Upon maturity, TIPS investors can either receive the face value of the bond or the inflation-adjusted principal amount, whichever is greater.

Originally posted 2017-01-07 20:57:16.

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