In the United States, Treasury bills, nominal Treasury notes and bonds, and Treasury Inflation-Protected Securities (TIPS) differ mainly in maturity, cash-flow timing, inflation exposure, and the price risk involved in selling before maturity. Bills mature in a year or less and pay their return at maturity; notes and bonds pay fixed interest every six months; TIPS adjust principal with inflation and pay interest on that adjusted amount. Other governments use different terms and rules, so this comparison is specifically about U.S. Treasury securities.
At a glance: bills, notes and bonds, and TIPS
| Feature | Treasury bills | Nominal Treasury notes and bonds | TIPS |
|---|---|---|---|
| Terms | One year or less; Treasury lists terms from 4 to 52 weeks. | Notes: 2, 3, 5, 7, or 10 years. Bonds are long-term issues, including 20- and 30-year terms. | 5, 10, or 30 years. |
| How payments work | Usually purchased at a discount or at face value; Treasury pays face value at maturity. The difference between purchase price and face value is the interest. | Fixed interest, set at auction, paid every six months; principal is paid at maturity. | Fixed coupon rate paid every six months on inflation-adjusted principal; at maturity, the adjusted principal is paid subject to an original-principal floor. |
| Inflation exposure | No CPI adjustment to principal. | Principal and coupon are nominal and fixed. | Principal is adjusted using a Consumer Price Index measure; the coupon rate is fixed, but the dollar payment varies with adjusted principal. |
| Key consideration before maturity | If sold early, the market price may differ from the purchase price. When a bill matures, reinvesting may mean accepting then-current terms. | Resale price can be above or below face value when market yields differ from the coupon rate; longer maturities generally have more price movement when yields change. | Inflation adjustment does not lock in a resale price; market value can fall below the amount paid. |
| Useful question | When will the money be needed, and what will happen when the bill matures? | Can the investment be held for the term, and is fixed nominal income suitable? | Is CPI-linked principal exposure useful, and can variable coupon dollars and possible tax effects be accommodated? |
How Treasury bills work
Treasury bills are short-term securities with maturities of one year or less. Treasury sells them at face value or at a discount; at maturity, the holder receives face value. The difference between the purchase price and face value is the bill’s interest. Bills do not make regular semiannual coupon payments, so they suit a different cash-flow schedule from notes, bonds, and TIPS.
A bill’s short maturity can limit how long money is committed, but maturity is not the same as guaranteed access to the original purchase amount at any moment. A bill can be sold before it matures, and its sale price depends on the market. If held to maturity, the investor receives face value; after maturity, the proceeds may need to be reinvested under the terms then available.
How nominal Treasury notes and bonds work
Treasury’s terminology is specific: 2-, 3-, 5-, 7-, and 10-year fixed-principal securities are notes, while longer-term fixed-principal issues are bonds. Treasury currently describes 20- and 30-year bond terms. Both notes and bonds pay fixed interest every six months, at a rate established at auction, and repay principal at maturity.
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The coupon rate is not the same thing as yield to maturity. A fixed-rate security may trade below face value when its yield to maturity is above its coupon rate, at face value when they match, or above face value when its yield to maturity is below its coupon rate. The price paid in the secondary market therefore affects the yield a buyer may receive if the security is held to maturity.
Holding to maturity and selling early are different outcomes. Before maturity, a note or bond’s market price may be more or less than the purchase price. Changes in market yields can move prices, and longer maturities generally expose investors to greater price movement from a given yield change.
How TIPS work—and what their inflation adjustment does not guarantee
Treasury Inflation-Protected Securities adjust principal using a measure based on the Consumer Price Index published by the Bureau of Labor Statistics. The coupon rate is fixed, but it is applied to the adjusted principal, so the dollar amount of each semiannual interest payment changes as principal changes. Principal can rise with inflation and fall with deflation.
At maturity, Treasury pays the inflation-adjusted principal or the original principal, whichever is greater. That floor applies to the maturity payment, not to an earlier sale: before maturity, TIPS trade at market prices, which can be below the investor’s purchase price. The floor also does not guarantee a positive real return after purchase price, taxes, or the effects of an early sale. TIPS can be purchased with a negative real-yield bid, and the price and holding period affect the result.
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Choose by timing, cash flow, inflation, and taxes
Match maturity to when the money may be needed
Start with the date the funds may be needed. A bill’s term is at most a year; notes, bonds, and TIPS can commit principal for longer. All are marketable securities and may be sold early, but an early sale is at the market price, not a promise to return the amount invested. TreasuryDirect defines marketability as the ability to transfer a security and sell it before maturity in its marketable securities overview.
Compare payment schedules
- Bills: no regular coupon; the return is generally the difference between the discounted purchase price and face value received at maturity.
- Notes and bonds: fixed coupon payments every six months.
- TIPS: coupon payments every six months at a fixed rate applied to principal that changes with the inflation adjustment.
Decide how much inflation exposure matters
Nominal notes and bonds keep their stated principal and coupon in dollars, so their purchasing power can be reduced by inflation. Bills likewise have no CPI-linked principal adjustment, though their short maturities allow proceeds to be reinvested sooner. TIPS connect principal to CPI, but their market prices still move and their dollar coupon payments vary as adjusted principal changes.
Account for federal taxes
Treasury says TIPS interest is federally taxable, and annual principal adjustments may also affect federal taxes even though the adjustment is not paid out as cash before maturity. TIPS are exempt from state and local taxes. Tax outcomes depend on individual circumstances and account type; consult current Treasury and IRS guidance or a tax professional for a specific situation.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Where to buy and what to check
Investors can buy Treasury securities through Treasury auctions or in the secondary market through brokers, dealers, or financial institutions. Providers may differ in fees, available features, and account requirements. Before placing an order, confirm the security’s maturity, price, yield, payment schedule, and whether the order is at auction or in the secondary market. Auction yields and offerings change over time, so use current Treasury auction results rather than an undated yield comparison.
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