Treasury notes pay fixed-rate interest every six months, then return their principal at maturity. The rate is set at auction and remains fixed for the life of the note, but the price an investor pays can be above, at, or below face value—so the coupon rate alone does not tell you the investment’s yield.
How a Treasury note pays you
A Treasury note is a marketable U.S. Treasury security with a term of 2, 3, 5, 7, or 10 years. Its interest rate is set at auction and stays fixed for the note’s life. The Treasury pays interest every six months. At maturity, the investor receives the principal and the final interest payment.
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That means a note has two cash-flow parts: recurring interest payments while it is outstanding, and a principal payment at the end. The principal is the face value of the note, not necessarily the amount the investor paid to acquire it. That distinction matters if the note was bought above or below face value, or was later sold in the market.
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- Issue: the note is sold at auction or acquired later in the secondary market. Its coupon rate is fixed for the note’s remaining life.
- During the term: interest is paid at six-month intervals.
- Maturity: the final interest payment and principal are payable. TreasuryDirect customers can take the payment or schedule reinvestment of the principal.
TreasuryDirect gives this example in its FAQ on marketable securities: “For example, a 10-year Treasury Note consists of 20 interest payments – one every six months for 10 years – and a principal payment payable at maturity.” The payment count follows from the ten-year term and semiannual schedule; it is not a promise that the investor will receive 20 payments if they buy after issuance or sell before maturity.
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How much interest will a note pay?
The coupon rate determines the interest the note is scheduled to pay, but it does not by itself establish the investor’s total return. Treasury notes can be bought for more than face value, face value, or less than face value. The purchase price affects the yield to maturity: when yield to maturity is higher than the interest rate, the price is below par; when yield and rate are equal, the price is at par; and when yield is lower than the rate, the price is above par.
In practical terms, the coupon answers, “What fixed interest payments does this note make?” Yield to maturity is the relevant comparison when considering the price paid and holding the note until it matures. Two notes with different coupon rates cannot be ranked by coupon alone if their prices differ. Compare the yield to maturity alongside the coupon, price relative to face value, maturity date, and payment dates.
What “at par,” “below par,” and “above par” mean
- At par: the price is equal to the note’s face value. Treasury’s relationship states that yield to maturity equals the interest rate in this case.
- Below par: the price is less than face value. Treasury states that yield to maturity is higher than the interest rate.
- Above par: the price is greater than face value. Treasury states that yield to maturity is lower than the interest rate.
These terms describe price against face value, not whether the note’s scheduled interest changes. The rate on an issued note remains fixed; a change in the market price changes the relationship between the price paid and the payments due.
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When interest and principal are paid
Interest arrives twice a year until maturity. Principal is due at maturity, along with the last scheduled interest payment. TreasuryDirect customers receive payments in the financial account they selected. For securities held through the Commercial Book-Entry System, payment may pass through financial institutions before reaching the investor.
If you hold a note in TreasuryDirect, you can schedule reinvestment of its principal instead of receiving that principal as a payment at maturity. That choice concerns the principal; the note’s interest payments are still made on the scheduled dates. The account and payment arrangements differ by holding system, so an investor should identify where the security is held and which account is set to receive its payments.
Federal tax timing
TreasuryDirect says federal tax is due each year on interest earned. The note’s semiannual payment schedule and the stated annual tax timing are separate considerations: receiving interest in installments does not make the tax point disappear until maturity. This article addresses federal tax only; it does not establish other tax treatment.
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What happens if you sell before maturity?
Treasury notes are marketable securities and can be sold before they mature. A sale is made at the prevailing market price, which may be different from the amount you paid. As a result, the note’s fixed coupon does not guarantee that an early sale will return the original purchase price.
Before deciding to sell, distinguish the cash flows already received from the sale proceeds still available. The coupon tells you the note’s scheduled interest, while the market price at the time of sale determines what a buyer will pay for the remaining security. The evidence here does not establish a future sale price; it will depend on the prevailing market price when the sale occurs.
This creates two different ways to assess a note. If you expect to hold it to maturity, compare its price, yield to maturity, payment schedule, and principal due date. If you may need to sell early, recognize that sale proceeds can differ from your original cost. Neither the coupon rate nor the maturity principal by itself fixes the amount you could receive from an earlier sale.
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Buying Treasury notes: auction or secondary market
Investors can acquire notes at auction or in the secondary market. TreasuryDirect accepts noncompetitive bids. An investor may also use a bank, broker, dealer, or other financial institution. The available route affects how the investor places the purchase and holds the security; the core note mechanics—fixed rate, semiannual interest, and principal due at maturity—remain the focus when comparing the investment.
TreasuryDirect lists a $100 minimum purchase in increments of $100. For a purchase through another financial institution, check that institution’s process and terms rather than assuming every account handles orders or payments in the same way.
Questions to settle before buying
- Which term fits the time horizon? Notes are issued in 2-, 3-, 5-, 7-, and 10-year terms. The maturity date tells you when principal is due if you continue to hold the security.
- What is the coupon rate? It is fixed once set at auction and determines the scheduled interest rate for that note.
- What price and yield are being offered? Price may be above, at, or below face value; compare yield to maturity rather than relying only on the coupon.
- When are the payment dates? Interest comes every six months. If you are considering a reopening, the payment dates are the original dates.
- How will you hold the note and receive payments? TreasuryDirect and the Commercial Book-Entry System use different payment paths.
- Could you need to sell before maturity? A sale is at the market price then prevailing, which can differ from your purchase price.
What a reopening changes—and what it does not
A reopening is an additional issue of a Treasury security that was issued previously. It keeps the original CUSIP, maturity date, and interest payment dates, but it has a different issue date and usually a different price. A reopening is therefore not a new maturity schedule: the security’s final date and regular interest dates remain those of the original issue.
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Accrued interest can affect the reopening purchase price. If accrued interest is included in what the buyer pays, Treasury says the buyer gets it back as part of the first regular interest payment. That is useful when comparing the cash paid at purchase with the first payment received: the first payment can include an accrued-interest amount rather than representing only a period that began on the new issue date.
How notes differ from bills and STRIPS
Treasury notes are not the only Treasury securities with principal due at maturity, but their payment structure is distinct. Treasury bills do not make the note-style semiannual coupon payments. A bill is sold at face value or at a discount, and the face value is paid at maturity; the difference between purchase price and face value is the interest. STRIPS use another structure: principal or each eligible interest payment becomes a separate zero-coupon security.
| Security | Payment structure | Key distinction |
|---|---|---|
| Treasury note | Fixed-rate interest every six months; principal at maturity | The coupon rate is set at auction and remains fixed over the note’s life. |
| Treasury bill | Sold at face value or at a discount; face value paid at maturity | The purchase-price difference is the interest; there are no note-style coupon payments. |
| STRIPS | Principal or each eligible interest payment becomes a separate zero-coupon security | Access requires a broker, dealer, or financial institution. |
For a reader comparing a note with a bill, the central trade-off in payment structure is regular cash flow versus a return realized through the difference between purchase price and face value at maturity. Do not compare their quoted rates as if they represented identical payment timing; first understand when the money is paid.
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Common misunderstandings to avoid
- “The coupon rate is my yield.” Not necessarily. The purchase price relative to face value affects yield to maturity.
- “I get my original purchase price back at maturity.” The principal due is the note’s face value. If the note cost more or less than face value, the original cost and maturity principal differ.
- “Fixed-rate means fixed market value.” The interest rate stays fixed, but a pre-maturity sale takes place at the market price then prevailing.
- “All Treasury securities pay interest the same way.” Notes make semiannual coupon payments; bills return face value at maturity, with interest represented by the discount from face value.
- “A reopening has new payment dates.” It retains the original security’s interest dates and maturity date, though it has a different issue date and usually a different price.
A practical way to compare two notes
Start with the maturity dates, not just the labels for the terms. Then compare the fixed coupon rate, price relative to face value, yield to maturity, and the dates on which interest is paid. Finally, decide whether your comparison assumes holding to maturity or leaves open an earlier sale. That last distinction matters because the market price at an early sale can differ from the amount paid.
For a note bought in a reopening, also account for the possibility that the price includes accrued interest and that this amount is returned in the first regular interest payment. For a note held through TreasuryDirect, consider whether you want the principal paid to your selected financial account or scheduled for reinvestment at maturity. These checks keep the comparison tied to the cash flows and holding choices that actually affect you.
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