The federal government offers three categories of fixed income securities to the buying public: Treasury bonds (T-bonds), Treasury notes (T-notes) and Treasury bills (T-bills). Each of these securities is issued with the full faith and credit of the U.S. government, and they are used as tools to fund its short- and long-term operations. Treasury bonds, notes and bills differ in the lengths of time they are issued and the manner in which each pays interest to investors.
T-bonds have the longest maturities of all government-issued securities and are often referred to as long bonds. These issues are offered to investors with either a 20- or 30-year term. In return for investment, individuals who purchase T-bonds receive an interest payment every six months per the terms of the bond issue. Because T-bonds have the longest time to maturity, their prices will fluctuate more than T-notes or T-bills. This long maturity also correlates to higher interest rates for investors.
T-notes are issued with shorter maturities than T-bonds, typically offered to investors with one-, five-, seven- or 10-year terms. Because the maturity date is shorter, interest rates are lower than those offered to T-bond investors, but semi-annual interest payments still occur. Prices on T-notes fluctuate more than T-bills but less than T-bonds, and issues that carry the furthest maturity date fluctuate in price the most. The 10-year T-note is the most widely tracked government bond, and it is used as a benchmark for banks and the Treasury market in calculating mortgage rates.
T-bills are issued with terms of four, 13, 26 or 52 weeks. They offer investors the lowest yield of all government bond issues. Similar to zero-coupon bonds, T-bills are auctioned off to investors at a discount to par. The difference between par value ($100) and the discount price is what investors view as its interest payment.