Treasury Bills, Notes, Bonds, TIPS and FRNs: A Complete Investor Guide

Key Takeaways

• TreasuryDirect groups its marketable securities as bills, notes, bonds, FRNs and TIPS, and separately describes STRIPS as a way of trading the interest and principal components of eligible notes, bonds and TIPS.
• Marketable has a precise meaning at Treasury: you can transfer the security to someone else and sell it before it reaches the end of its term. That is the property savings bonds do not have.
• Bills are sold at a discount or at par and repay face value at maturity, so the return is the gap between the two rather than a periodic payment.
• Notes run 2, 3, 5, 7 or 10 years and bonds run 20 or 30 years. Both pay a fixed rate every six months, so the difference between them is term, not mechanism.
• The auction is single price. Non-competitive bids accept whatever the auction produces, and every successful bidder receives the same rate, yield or discount margin as the highest accepted bid.
• Treasury interest is subject to federal tax and exempt from state and local taxes, which means a headline yield comparison against a fully taxable alternative is not a like-for-like comparison.
• Credit risk is not the only risk. Interest rate risk, inflation risk and reinvestment risk all survive intact, and the first of those is what turns a safe issuer into a losing sale.

What Are Treasury Marketable Securities?

A Treasury marketable security is a loan to the U.S. federal government with a stated term and a stated way of paying interest. TreasuryDirect defines the word marketable directly: it means that you can transfer the security to someone else and you can sell the security before it matures. Savings bonds do not carry that property, which is why they sit outside this family.

That single definition carries a consequence worth stating before any of the product detail. A security you can sell before maturity is a security whose value can be observed every day, and an observable value is one that can be lower than what you paid. The ability to exit early and the ability to lose money on the exit are the same feature seen from two directions.

Every marketable Treasury is first sold at auction. After that it trades in a secondary market through banks, brokers and dealers, where the price is whatever buyers and sellers agree on that day. A purchase made at auction and a purchase made in the secondary market give you the same contractual cash flows if the security is the same, but they are reached by different routes and at different prices.

For a shorter orientation to the same family, see Treasury Securities Explained. This guide goes further into the selection question: which term, which interest mechanism, and what the choice costs if the money is needed early.

What Are the Types of Marketable Treasury Securities?

The terms below are the ones TreasuryDirect publishes for each security. They are the product definitions, not market conditions, so they do not change with the rate environment.

TreasuryDirect states a minimum purchase of $100 for bills, notes and bonds, bought in increments of $100. The practical constraint for most individual holders is therefore not the size of the ticket. It is the auction calendar and the bidding method, both of which are covered below.

STRIPS sit alongside this list rather than inside it. TreasuryDirect describes them as a way of trading the individual interest and principal components of eligible notes, bonds and TIPS separately, held and sold through brokers and financial institutions rather than bought directly at auction.

How Does a Treasury Bill Pay Interest Without a Coupon?

It pays by price convergence. TreasuryDirect puts it in one sentence: for bills, interest is the difference between what you paid and the face value you get when the bill matures. There is no periodic payment, which is why a bill's return is quoted as a discount rate or an investment rate rather than a coupon.

A hypothetical illustration, chosen so the arithmetic can be checked by hand. A holder pays $9,800 for a bill with a face value of $10,000. At maturity Treasury pays $10,000. The dollar interest is:

$10,000 − $9,800 = $200

That $200 is 2.0408 percent of the $9,800 actually committed. It is not an annual rate until the holding period is specified. If the bill had 182 days to run and the return is annualised on a 365-day basis, the figure becomes 2.0408 percent multiplied by 365 divided by 182, or roughly 4.09 percent. Change the day count convention and the number moves without anything about the security changing, which is the single most common source of confusion when two quoted bill yields are compared side by side.

The structural consequence of having no coupon is that the entire return arrives at one moment. Nothing is paid out along the way to be spent or reinvested, and nothing is at risk of being reinvested at a worse rate before the maturity date. The reinvestment problem is deferred to maturity rather than removed.

How Do Treasury Notes and Bonds Differ?

Only by term. TreasuryDirect describes both as paying a fixed rate of interest every six months until they mature, at which point the principal is repaid. Notes are sold for 2, 3, 5, 7 or 10 years. Bonds are sold for either 20 or 30 years.

Because the mechanism is identical, everything that distinguishes a 30-year bond from a 3-year note flows from the length of time the fixed rate is locked in. A longer lock is more valuable when rates fall and more painful when they rise, and the market price adjusts continuously to reflect that.

The contractual cash flows of a note or bond held to maturity are known in nominal terms on the day it is bought. What is not known is the purchasing power of those dollars, or the price the security would fetch at any point in between. Those are two separate uncertainties that a fixed coupon does nothing about, and they are covered in the risk section below.

How Do TIPS Protect Against Inflation?

The principal moves. TreasuryDirect states that the principal of a TIPS goes up with inflation and down with deflation, using a version of the Consumer Price Index published by the Bureau of Labor Statistics. The interest rate itself is fixed, but because interest is paid on the adjusted principal, the size of each payment varies with the index.

There is a floor at maturity, and TreasuryDirect words it plainly: when a TIPS matures, if the principal is equal to or lower than the original amount, you get the original amount. You never get less than the original principal. That protection applies to the original principal at maturity. It does not apply to the price paid by someone who bought the security in the secondary market above that amount.

What TIPS do not remove is real interest rate risk. A TIPS still has a market price, and that price responds to changes in real yields the same way a nominal bond's price responds to changes in nominal yields. A period of rising inflation accompanied by rising real yields can produce a falling TIPS price, which is the outcome that surprises holders who expected the security to track the inflation headline directly. The dedicated guide, TIPS and Inflation-Protected Securities, goes further into that mechanism.

How Does a Floating Rate Note Reset?

Weekly, against the shortest bill Treasury sells. TreasuryDirect describes the FRN index rate as tied to the highest accepted discount rate of the most recent 13-week Treasury bill. Because that bill is auctioned every week, the index rate of an FRN resets every week. Interest is paid four times a year, and the security matures in two years.

On top of the index sits a spread. TreasuryDirect states that the spread is determined at the auction when the FRN is first offered, and that it equals the highest accepted discount margin in that auction. The spread is then fixed for the life of that security while the index underneath it keeps moving.

The design has a specific effect on price behaviour. A security whose coupon follows short-term rates almost immediately has far less reason to reprice when those rates move, because the payment adjusts instead of the price. That is the opposite trade from a long fixed-rate bond, and it comes with the opposite drawback: when short-term rates fall, the income falls with them.

Why Do Treasury Prices Move Opposite to Yields?

Because the coupon is fixed and the market's required return is not. The SEC's investor bulletin on fixed income states the relationship directly: market interest rates and bond prices generally move in opposite directions, and the longer the bond's maturity, the greater the risk that its value could be affected by changing interest rates.

TreasuryDirect frames the same idea from the pricing side. When the yield to maturity is greater than the interest rate, the price is less than par value. When the two are equal, the price is par. When the yield is less than the interest rate, the price is above par.

A first-party calculation makes the size of the effect concrete. Take a hypothetical 10-year security with a 4 percent annual coupon paid semiannually on $1,000 of face value, so 20 payments of $20 plus $1,000 at the end. Discount those cash flows at a required yield of 5 percent a year, which is 2.5 percent per half year, and the present value is $922.05. Discount the identical cash flows at 3 percent a year, or 1.5 percent per half year, and the present value is $1,085.84.

Nothing about the security changed between those two numbers. The issuer is the same, the coupon is the same, the maturity date is the same. Only the rate the market demands changed, and the price moved $163.79, which is about 18 percent of the lower of the two figures. This calculation ignores taxes, accrued interest and transaction costs, and the yields are round numbers picked so the arithmetic can be reproduced rather than observed market levels. For the yield measures behind it, see Bond Prices and Yields.

What Does Duration Tell You About Rate Sensitivity?

Duration converts the vague statement that longer bonds are riskier into a number. Modified duration estimates the percentage change in price for a one percentage point change in yield, through the first-order approximation:

Percentage price change ≈ −modified duration × change in yield

A security with a modified duration of 8 facing a yield rise of one percentage point, or 0.01, therefore has an estimated price change of −8 multiplied by 0.01, which is −8 percent. The same security facing a one point fall in yields has an estimated gain of 8 percent.

The approximation is a straight line drawn against a curve. The real price and yield relationship bends, and the property that describes the bending is convexity. For a plain non-callable security, that curvature works in the holder's favour in both directions: the actual gain when yields fall exceeds the duration estimate slightly, and the actual loss when yields rise falls slightly short of it. The error is small for small yield moves and grows with the size of the move, which is why duration alone is a poor guide to a large rate shock. Bond Duration Explained works through Macaulay, modified and effective duration in detail.

Two practical points follow. First, duration is measured in years but is not the same as maturity, because coupons return cash before the maturity date and shorten the effective wait. Second, a zero-coupon security such as a Treasury bill returns nothing before maturity, so its duration is essentially its remaining term, which is one reason short bills move so little in price.

How Does a Treasury Auction Set the Rate?

Treasury runs a single-price auction, and TreasuryDirect describes the outcome in one line: all successful bidders get the same rate, yield or discount margin as the highest accepted bid. The bidder who was willing to accept the least does not get a better deal than the bidder who set the clearing level.

There are two ways to bid. A non-competitive bid, in TreasuryDirect's words, means you agree to accept the rate, yield or discount margin determined at the auction, with a maximum of $10 million per auction. A competitive bid means you specify the rate, yield or discount margin that you will accept, with a maximum of 35 percent of the offering amount.

The access rule matters more than either limit for an individual. TreasuryDirect states that to bid competitively you must use a bank, broker or dealer, and that a TreasuryDirect account holder bids non-competitively. In practice that means an individual buying at auction is accepting the market's clearing level rather than negotiating one.

Knowing the mechanism is useful even for someone who never bids. The auction is where the terms of a newly issued security are set, and the secondary market prices every existing security against those newly set terms.

TreasuryDirect or a Brokerage Account?

The two routes are not competing on price so much as on what each one can do. TreasuryDirect is the government's own platform, where securities are bought at auction and held in an account with Treasury. A brokerage account reaches both new auctions and the secondary market, where existing securities of every remaining maturity trade at whatever price the market sets that day.

Three differences do most of the work when the routes are compared:

• Available maturities at any given moment. An auction offers the terms Treasury is issuing that week. The secondary market offers whatever already exists, including a security maturing on a date no current auction produces.
• Ability to sell before maturity. A marketable security can be sold, but the sale happens where there is a market for it. That is the secondary market, reached through a bank, broker or dealer.
• Reporting alongside the rest of a portfolio. A holding in a separate government account is not visible in a brokerage statement, which matters for anyone tracking an allocation across accounts.

A secondary market purchase also involves a dealer's bid and ask, which an auction purchase does not. Whether that spread is material depends on the size of the trade and the security involved, and it is not disclosed as a separate line item the way a commission would be. Specific fee schedules, minimums and account features vary by institution and change, so they are worth reading from the institution's own current disclosures rather than from any third-party summary.

How Are Treasury Securities Taxed?

TreasuryDirect states the rule in one sentence: what you earn from your Treasury marketable securities is subject to federal tax but is exempt from state and local taxes. That exemption is the reason a Treasury yield and the yield on a fully taxable alternative cannot be compared as printed.

The exemption applies to the interest. It does not convert a capital gain realised by selling before maturity into tax-exempt income, and it says nothing about how the annual inflation adjustment on a TIPS is treated, which is a separate question governed by federal tax rules rather than by the state and local exemption.

Because the size of the benefit depends on a specific holder's own state, filing situation and marginal rates, the only honest comparison converts one yield to the other's basis before ranking them. Tax rules change and vary by jurisdiction. This page describes the mechanism and does not substitute for current IRS guidance or advice from a qualified tax professional. The broader account and tax rules live under Taxes and Rules.

Treasury Bills Compared With CDs and Money Market Funds

All three are used for money with a short horizon, and all three behave differently under stress. The comparison below states only what can be sourced to the issuer or regulator of each product.

The SEC groups money market funds into government funds, tax-exempt or municipal funds, and prime funds, and states that money invested in a money market fund is not guaranteed by the FDIC like bank accounts are. A bank money market deposit account is a different product with a similar name. For the full treatment of the cash end of a portfolio, see Money Market Funds and Treasury Bill vs CD.

The general point survives the specifics: the highest headline yield of the three is not automatically the best outcome once the tax treatment, the protection structure and the cost of an early exit are all counted.

Laddering and Barbells: Structuring Maturities

A ladder spaces maturities at regular intervals so principal returns on a schedule. A hypothetical $60,000 held for near-term needs, split into four equal pieces of $15,000 maturing three months apart, produces a maturity every quarter rather than one maturity a year from now.

What that structure buys is the removal of a single timing decision. Instead of committing the whole sum at one rate on one day, the holder ends up owning an average of the rate environment across the period. What it costs is administration, a repeated reinvestment decision, and the possibility that short maturities underperform if rates fall and a longer term could have been locked in earlier.

A barbell is the other common shape: weight at the short end and the long end, with little in the middle. It combines near-term liquidity with long-duration exposure, and it responds differently to a change in the shape of the yield curve than a ladder with the same average maturity does. Neither shape is a forecast. Both are ways of deciding how much of the portfolio's outcome should depend on a single date. Bond Ladders works through the construction and rollover mechanics.

Which Risks Survive When Credit Risk Is Removed?

Three, and each one has a different remedy.

Interest rate risk. The SEC's fixed income bulletin makes the boundary explicit: the U.S. government does not guarantee the market price or value of the bond if you sell the bond before it matures. The guarantee covers the scheduled payments and the return of principal at maturity, not the resale value on any date in between. Duration measures the exposure; matching maturity to the date the money is needed is what neutralises it.

Inflation risk. A nominal Treasury promises dollars, not purchasing power. A rough approximation subtracts inflation from the nominal return, and the exact version is:

real return = (1 + nominal return) ÷ (1 + inflation) − 1

At a 4 percent nominal return with 5 percent inflation, that gives 1.04 divided by 1.05 minus 1, which is roughly −0.95 percent. The nominal return was positive and the purchasing power still fell. TIPS address this specific risk by indexing principal; a nominal security does not.

Reinvestment risk. Every maturing bill and every coupon payment has to be redeployed at whatever rate exists on the day it arrives. Short maturities reduce price sensitivity and increase how often that decision has to be made. Long maturities do the reverse. That trade is the central structural choice in a Treasury allocation, and no security offered by Treasury escapes both sides of it.

Common Mistakes and Misconceptions

• Treating every Treasury as cash. A 30-year bond and a 4-week bill are issued by the same government and behave nothing alike before maturity. Term, not issuer, drives the price swing.
• Choosing a maturity purely by the highest yield on the screen. A higher yield somewhere on the curve is compensation for something, usually duration. The yield is the price of the risk, not a free upgrade.
• Confusing the coupon with the yield. TreasuryDirect's pricing page is explicit that a security whose yield to maturity exceeds its interest rate trades below par. The coupon describes the payment; the yield describes the return from the price actually paid.
• Ignoring the state and local exemption when comparing products. A Treasury yield and a fully taxable yield are quoted on different after-tax bases.
• Buying a long maturity for a short-dated need. This is the mismatch the SEC bulletin's warning about market price is describing. A safe issuer does not make an early sale safe.
• Expecting a bond fund to return principal on a personal date. An individual security has a maturity date. A perpetual fund portfolio does not.
• Assuming TIPS rise whenever inflation is in the news. The principal indexes to CPI, but the market price still responds to real yields, and those can rise at the same time.

A Checklist Before Buying a Treasury Security

The questions below turn a rate-shopping exercise into a cash-flow one. They are prompts for the reader's own analysis, not a recommendation about any security.

1. Purpose. Is this money a reserve, a known future payment, a portfolio diversifier, an income source or an inflation hedge?
2. Need date. On what date might the principal actually be spent?
3. Security type. Does the job call for a bill, a note, a bond, TIPS or an FRN?
4. Term match. Does the maturity land on or before the need date?
5. Yield basis. Are the yields being compared quoted on the same convention?
6. Duration. What is the estimated price move if the security has to be sold after a one point rate change?
7. Inflation exposure. Is nominal protection sufficient for this horizon, or is indexed principal the point?
8. Reinvestment. When does the proceeds decision come back around, and how often?
9. Tax location. Is the state and local exemption worth anything in this account and this jurisdiction?
10. Venue. Auction through TreasuryDirect, auction through a broker, or the secondary market?

Frequently Asked Questions

References

Every source below was retrieved and read on 25 August 2026, and the document title shown is the title the page actually carries.

• TreasuryDirect: About Treasury Marketable Securities: the definition of marketable, the list of security types, and the description of STRIPS as a separate way of holding the components of eligible notes, bonds and TIPS.
• TreasuryDirect: Treasury Bills: the published bill terms, the sale at a discount or at par, the minimum purchase and increment, and the statement that interest is the difference between the price paid and the face value at maturity.
• TreasuryDirect: Treasury Notes: the 2, 3, 5, 7 and 10 year terms, the six-month interest schedule, and the $100 minimum and increment.
• TreasuryDirect: Treasury Bonds: the 20 and 30 year terms and the fixed rate paid every six months until maturity.
• TreasuryDirect: Treasury Inflation-Protected Securities (TIPS): the 5, 10 and 30 year terms, the CPI-based principal adjustment, interest paid on adjusted principal, and the floor that returns the original principal at maturity.
• TreasuryDirect: Floating Rate Notes (FRNs): the two-year term, quarterly interest, the index tied to the most recent 13-week bill's highest accepted discount rate, the weekly reset, and the spread set at the first auction.
• TreasuryDirect: How Auctions Work: the single-price outcome, the competitive and non-competitive bid definitions, the $10 million and 35 percent limits, and the requirement to use a bank, broker or dealer to bid competitively.
• TreasuryDirect: Understanding Pricing and Interest Rates: the relationship between yield to maturity, the interest rate and whether a security prices below, at or above par.
• TreasuryDirect: Tax Forms and Tax Withholding: the statement that earnings from Treasury marketable securities are subject to federal tax and exempt from state and local taxes.
• SEC: Investor Bulletin, Fixed Income Investments, When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall: the inverse relationship between market rates and fixed-rate bond prices, the greater exposure of longer maturities, and the statement that the U.S. government does not guarantee the market price of a bond sold before maturity.
• FDIC: Deposit Insurance: certificates of deposit listed among the covered deposit account types, and the statement that deposits are automatically insured to at least $250,000 at each FDIC-insured bank.
• SEC: Money Market Funds: what money market funds hold, the government, tax-exempt and prime categories, and the statement that money invested in one is not guaranteed by the FDIC like bank accounts are.

The bill discount example, the 10-year price calculation at 5 percent and 3 percent required yields, the duration estimate and the real return figure are original hypothetical calculations from the assumptions stated beside each one. The rates are round numbers chosen so the arithmetic can be checked, not observed market levels, and every example ignores taxes, transaction costs and accrued interest. This is educational content about how these securities work, not personalised investment, tax or legal advice.