The Advantages of Investing in T-Notes

Alexander Hamilton served as the first Secretary of the Treasury.

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The federal government requires a steady flow of money to operate. When the government spends more money than it takes in, it has to borrow money to make up the difference. The United States Department of the Treasury borrows money from individual, institutional and government investors by selling U.S. government securities, such as Treasury Bonds, Treasury Bills and Treasury Notes. Advantages to owning T-Notes include safety and liquidity, along with certain tax benefits.

Safety

T-Notes are debt obligations of the federal government. They are backed by the full faith and credit of the United States and are considered to be the safest of all investments, according to the Securities Industry and Financial Markets Association. T-Notes are not rated by any credit rating agency, such as Standard and Poor's or Moody's, because they are considered to have no risk of default.

Liquidity

You have the option of holding your T-Notes until they mature, or you can sell them in the secondary market. The market for T-Notes and other U.S. government securities is one of the largest and most liquid bond markets in the world. There is a ready market for your T-Notes should you need or desire to sell them prior to maturity. You can sell your T-Notes in the secondary market through your bank, investments broker or dealer.

Income Taxes

T-Notes pay regular interest every six months. The interest paid on your T-Notes is fully taxable on your federal income tax return in the year you receive it, but is exempt from all state and local income taxes. The U.S. Department of the Treasury offers tax withholding of up to 50 percent on T-Notes that are held in your TreasuryDirect account.

Considerations

T-Notes are intermediate-range debt investments that have maturities of between two and 10 years. They pay a fixed rate of interest, which is determined at the time of auction. The market price of T-Notes will fluctuate after they are issued, based on prevailing interest rates. T-Notes held to maturity will always be redeemed at their full face value, but the price of T-Notes in the secondary market may be more or less than their face value.

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