U.S. Treasury Securities

Every other bond in the market is priced relative to these three instruments, so the exam expects you to know each one's maturity range, quotation method, and tax treatment cold, plus how they differ from one another.

What Are Treasury Bills (T-Bills)?

T-bills are the shortest-maturity Treasury security and function as zero-coupon instruments.

• Because T-bills pay no periodic interest, they are effectively zero-coupon instruments
• T-bills are considered the most liquid and lowest-risk marketable securities in the world
• The discount yield on T-bills is the benchmark for money market rates

Think of it this way: You buy a T-bill for $980 and receive $1,000 at maturity. That $20 difference is your return. No interest checks arrive in the mail; you simply pay less up front and get face value back later.

Exam Tip: Gotchas

T-bills do NOT pay semiannual interest. The investor's return is the discount (difference between purchase price and $1,000 face value). The exam may describe a T-bill paying "interest" to test whether you know it is a discount instrument.

What Are Treasury Notes (T-Notes)?

T-notes occupy the intermediate maturity range and pay a fixed coupon semiannually.

• The 10-year Treasury note yield is the most widely watched benchmark for long-term interest rates
• Mortgage rates, corporate bond spreads, and other fixed-income yields are typically quoted as a spread above the 10-year note

Exam Tip: Gotchas

T-notes and T-bonds are quoted in 32nds of par, not in decimals. A quote of 99-16 means 99 and 16/32 = 99.50% of par. The exam may show a price like "101-08" and expect you to convert it to 101.25% of par (8/32 = 0.25).

What Are Treasury Bonds (T-Bonds)?

T-bonds carry the longest maturities of any Treasury security and therefore have the greatest interest rate risk.

• T-bonds have the greatest price sensitivity to interest rate changes due to their long duration
• Some older T-bonds may be callable at par 5 years before maturity, but the Treasury no longer issues callable bonds

Exam Tip: Gotchas

Longer maturity = greater interest rate risk. If the exam asks which Treasury has the most price volatility, the answer is T-bonds (20-30 years), not T-notes or T-bills. Also, while some older T-bonds are callable, the Treasury stopped issuing callable bonds in 1985.

What Do All Marketable Treasuries Have in Common?

All Treasury bills, notes, and bonds share these characteristics:

• Credit quality: Backed by the full faith and credit of the U.S. government (the highest credit quality available)
• Default risk: Considered to have zero default (credit) risk
• Other risks still apply: Interest rate risk, inflation risk, and opportunity cost risk
• Auction process: Sold at auction by the U.S. Treasury through competitive and noncompetitive bids
• Primary dealers: Designated by the Federal Reserve Bank of New York, primary dealers are required to bid at Treasury auctions and make markets
• Secondary market: Trade over-the-counter (OTC), not on exchanges
• Day-count basis: Interest accrues on an actual/actual basis (actual days elapsed / actual days in the coupon period)
• Form: All issued in book-entry form only (electronic records, no physical certificates)

Exam Tip: Gotchas

Treasury securities are exempt from state and local income tax, but NOT from federal income tax. The exam frequently tests this distinction. Also, all Treasury securities carry a $100 minimum purchase (not $1,000 as some older materials state).

How Do T-Bills, T-Notes, and T-Bonds Compare?

Think of it this way: Treasury securities sit on a spectrum. T-bills are the shortest and safest (weeks to a year, no coupon payments). T-notes are in the middle (2-10 years, semiannual coupons). T-bonds are the longest (20-30 years, semiannual coupons). The longer the maturity, the more the price swings when interest rates change.

What Should You Check on Exam Day?

• Identify whether a security pays a discount return (T-bill) or a semiannual coupon (T-note, T-bond) before answering an interest-payment question.
• Convert a 32nds price like "101-08" to a decimal percentage (8/32 = 0.25, so 101.25% of par) before comparing it to another quote.
• Remember the federal-taxable, state/local-exempt split applies to all three, not just T-bills.
• Match "greatest interest rate risk" or "most price volatility" to T-bonds, the longest maturity, not to T-bills.
• Confirm the security is book-entry only and trades over the counter, not on an exchange, before applying settlement or listing rules.