Treasury Note Definition
Treasury Note is an instrument carrying a fixed rate of interest and duration issued by the government in the market. This note is the most preferred option as it is issued by the government (hence no risk of any default) and also provides a guaranteed amount as return thereupon which helps the investor to plan their expenses accordingly. It suits best for those who are dependent on someone such as senior citizens who need regular funds to live their livelihood.
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 form of interest.
- The returns earned are tax-free i.e. exempt from tax.
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For eg:
Source: Treasury Note (wallstreetmojo.com)
Example of Treasury Note
Let take an example.
Suppose Mr. A has invested in the government scheme of Treasury note which is as follows:
- Period of Investment = 2 years
- Rate of Interest = 12% p.a.
- Amount invested = $1,000,000
- Interest due and payable = every 6 months
- Date of investment = 01.04.2020
- Date of Maturity = 31.03.2022
Maturity Amount will be paid along with the last interest.
Solution:
First, we have to calculate the half-yearly rate of interest i.e. rate of interest for 6 months, which is as follows:
Half-Yearly Rate = 12% * 6 months / 12 months = 6%.
Amount of interest to be received on investment at the end of every 6 months will be –
Amount of interest to be received on investment at the end of every 6 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
Here 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 last interest payment as maturity value.
How to Buy Treasury Note?
There are two options to invest in such securities, which are as follows:
- Investment through Broker, Bank, or any authorized intermediary who will do all the legal formalities on behalf of us 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 add the amount of purchase in such 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 it gives us the return which is quite lower as compared to various other investment options available in the market. As the investments are made for such a long span in case the investor has some other better opportunities or is in need of funds they cannot withdraw the funds 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 which are risk-free and will earn a fixed rate of interest so to fulfill that part of investment this is the most considered option which is chosen by the investors as it is issued by the government itself, 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 or a T-Bill controls temporary liquidity fluctuations. The Central Bank is responsible for issuing the same on behalf of the government. It is given at its redemption price and a discounted rate and is repaid when it reaches maturity.read more has a maturity period of less than a year.
- Treasury note is issued at face value but on the other hand, Treasury bill may also be issued at discount.
- The investment in Treasury note must be from the spare funds which are not required for such a long the span of time but investments in Treasury bills could be short term as well which also earns short term profits to the investors.
Advantages
- As it carries a fixed rate of interest payable after every 6 months one can easily plan its income and expenses accordingly.
- The receipt of interest from such Treasury note will be tax-free or say 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 gives the investor an option to quote its own required rate of interest which might get approved.
Disadvantages
- As it provides the investor to quote its own rate of return, on approval it will cost more to the government.
- 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 if the investor redeems its investment before maturity.
Conclusion
To conclude, the term ‘Treasury Note’ these are considered as 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 rate of interest. The trading is on the online platform so there is no need for any such intermediary as all of the facilities can be self accessed and used through logging into our account which also includes purchasing and redeeming of investments as well.
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