Bonds, notes, bills all vary

Big difference is in how long they take to mature

Question: I’ve heard Treasury securities referred to as bonds, notes and bills. What’s the difference?

Answer: There are lots of similarities among these types of fixed-income investments. All are backed by the U.S. government and can be purchased through a broker or from the U.S. Treasury at www.TreasuryDirect.gov.

The primary difference is the time each takes to mature. Also, one has a different interest-payment structure.

First, Treasury bills mature in a year or less. Because of their short duration, these securities don’t make regular interest payments — after all, bonds generally pay every six months, so what would a 90-day Treasury bill do? Instead, Treasury bills are sold at a discount to their face value, and investors get the full amount upon maturity.

As an example, a Treasury bill may be sold for $99 with a face value of $100. The additional $1 given at maturity represents “interest” paid to the investor.

Treasury notes have maturities from two to 10 years; Treasury bonds have maturities of greater than 10 years. Both pay interest semi-annually, and the only real difference is their maturity length.

The longer the maturity of a Treasury security, the higher the annual yield it will pay. For example, a 30-year Treasury bond can be expected to have a higher annual yield than a 10-year Treasury note issued at the same time, which would in turn yield more than a 26-week Treasury bill.