Treasury bills, notes and bonds, Treasury receipts and STRIPS, and Treasury auctions

Treasury payment patterns

Treasury securities are direct U.S. government debt. Government credit backing does not prevent a market loss on a sale before maturity.

• Bills: original maturity of one year or less; issued at a discount, with face value paid at maturity and no periodic coupon. Buying at $9,800 and receiving $10,000 produces $200 of interest, not a stated annualized yield.
• Notes: original maturities of two through ten years; fixed semiannual coupons.
• Bonds: original maturities longer than ten years; fixed semiannual coupons. Remaining maturity does not change the original product classification.
• TIPS: Treasury Inflation-Protected Securities adjust principal with a consumer price index. A fixed coupon rate applied to adjusted principal changes the semiannual dollar payment. Maturity repayment is the greater of original or adjusted principal; this does not protect a secondary-market premium.

Separating payments

STRIPS means Separate Trading of Registered Interest and Principal of Securities. Eligible Treasury interest and principal payments become separately traded zero-coupon components. Each component pays once at its own maturity. They are obtained through financial institutions and dealers rather than as separate new issues at Treasury auctions. Privately created Treasury receipts represent interests in Treasury payments held by a custodian; distinguish them from the Treasury book-entry STRIPS program.

Zero-coupon securities have no interim cash interest to reinvest, but generally have greater interest-rate sensitivity than coupon securities with comparable maturity. STRIPS accrued discount generally creates annual federal taxable income in a taxable account even without cash receipts. Treasury interest is generally federally taxable and exempt from state and local income taxes.

Auction choices

A noncompetitive bidder accepts the auction-determined rate or yield and receives the requested quantity within auction limits. A competitive bidder specifies a rate or yield and may receive all, part, or none of the requested quantity. Accepted bids for the same security receive the same auction-determined price. Treasury securities are exempt from Securities Act registration; the exemption does not describe their payment pattern or remove market risks.