In the wake of the SVB fallout, companies are looking for safe, secure places to deposit their funds. At the same time, companies also want to earn returns on their hard-earned cash.
This has led many companies to look at Treasury securities - notes, bills, and bonds. What do they all mean, and what is the difference between them? Here, we take a look at the similarities and differences between these government-backed securities.
First, some background:
The United States needs to borrow funds in order to fund various governmental activities - everything from building roads and schools to operating our national defense budget to fixing infrastructure. To do this, they issue securities, in which they essentially borrow money from businesses or consumers for a fixed period of time. At the end of the maturity period, they repay their investors the original amount plus a certain amount of interest.
Treasury bills, notes, and bonds are all types of debt securities issued by the U.S. Treasury Department. While they share similarities, there are differences in terms of their maturity periods, interest rates, and denominations. Here’s a breakdown of each:
Treasury bills (T-bills): T-bills are short-term debt securities with maturities of one year or less. They are issued at a discount to their face value and pay no interest until maturity, at which point the investor receives the full face value of the bill. For example you can currently buy a 3 month T-bill expiring June 10th this year for $98.85 and on June 10th the U.S Government pays you $100. T-bills are considered to be among the safest investments as they are backed by the full faith and credit of the U.S. government with no exposure to bank risks.
Treasury notes (T-notes): T-notes are medium-term debt securities with maturities ranging from 2 to 10 years and interest is paid out every six months. T-notes are often used by investors as a way to earn a higher rate of return than T-bills, but they are subject to a higher level of risk given their longer maturity.
Treasury bonds (T-bonds): T-bonds are long-term debt securities with maturities of more than 10 years. T-bonds can potentially offer a higher rate of return among the three types of securities, but also carry the highest level of risk.
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Source: U.S. Treasury Department
