Treasury Notes

Treasury Notes – Meaning, Example and Advantages

Government-issued Treasury Notes are stable financial instruments with maturity ranging from 1 to 10 years. They provide investors with a consistent interest rate and assure semi-annual interest payouts. Their backing by the government makes them a reliable investment option.

Content :

What is a Treasury Note?

A Treasury Note is a government debt security with a fixed interest rate and a maturity period of 1 to 10 years. These notes are a secure investment, backed by the government, and pay interest to the holder every six months until maturity.

In India, the interest rate on Treasury Notes is determined by market demand and supply, reflecting the prevailing economic conditions. These notes are a key tool for the government in managing its financing needs. For investors, they offer a balance of safety and a predictable return, making them popular in conservative investment portfolios.

Treasury Notes Example

An example of a Treasury Note in India would be a 5-year Government of India Treasury Note. For instance, if an investor buys a ₹1,00,000 Treasury Note with an annual interest rate of 6%, they would receive semi-annual interest payments amounting to ₹3,000 every six months.

At the end of the five years, the investor would have received a total interest of ₹30,000 in addition to the principal amount of ₹1,00,000. This example demonstrates how Treasury Notes in India provide a steady and reliable income stream over a fixed period, making them an appealing option for risk-averse investors seeking predictable returns.

How To Buy Treasury Notes?

Purchasing Treasury Notes in India involves participating in auctions conducted by the Reserve Bank of India (RBI). These auctions are announced regularly and offer investors an opportunity to buy these government securities directly from the government.

  1. Create an Account: Open a demat account with Alice Blue.
  2. Understand Auction Types: Familiarize with the auction process – ‘yield-based’ for new issues and ‘price-based’ for existing ones.
  3. Place a Bid: Bid in the auction through your demat account or RBI’s Retail Direct Scheme, choosing between competitive and non-competitive bids.
  4. Await Auction Results: Post bidding, await the results to see if your bid was successful.
  5. Receive and Manage Treasury Notes: Successful bids result in Treasury Notes being credited to your demat account, where you can manage them and track interest payments and maturity dates.

Advantages Of Treasury Notes

A key advantage of Treasury Notes in India is their high safety profile, as they are government-backed, which virtually eliminates the risk of default. This feature is particularly appealing in volatile market conditions.

  • Guaranteed Returns: Treasury Notes offer a fixed interest rate, ensuring a stable and predictable income stream. This is ideal for conservative investors prioritizing steady cash flow over high-risk, high-reward investments.
  • Liquidity: They are relatively liquid assets. Investors can easily sell them in the secondary market if they need access to funds, making them a flexible investment option compared to other long-term government securities.
  • Portfolio Diversification: Adding Treasury Notes to an investment portfolio helps diversify risk, which is especially useful for balancing more volatile investments like stocks. This diversification can improve the overall risk-return profile of an investment portfolio.
  • Tax Benefits: Although the interest income from Treasury Notes is taxable, no TDS (Tax Deducted at Source) is applicable. This feature simplifies the tax-handling process for investors.
  • Inflation Protection: For longer-term Treasury Notes, there’s an element of protection against inflation. While they may not outpace high inflation rates, they offer more stability than other fixed-income instruments in such environments.

Disadvantages Of Treasury Notes

A significant drawback of Treasury Notes in India is their relatively lower yield, especially compared to high-risk investments like equities. This conservative return profile might not align with the financial goals of aggressive investors.

  • Interest Rate Risk: If market interest rates rise, the value of existing Treasury Notes can fall. This is because newer issues might offer higher yields, making older, lower-yielding notes less attractive.
  • Inflation Risk: The inflation rate could exceed the yield of Treasury Notes. In such scenarios, the real return (interest rate minus inflation) could be negative, leading to decreased purchasing power.
  • Opportunity Cost: By opting for the safety of Treasury Notes, investors may miss out on higher returns from other investment vehicles like stocks or mutual funds, especially in a bullish market.
  • Limited Growth Potential: Treasury Notes are designed for stability and security, not for growth. Investors seeking capital appreciation instead of income generation might find them less attractive.
  • Market Volatility Impact: The pricing of Treasury Notes in the secondary market can be influenced by market volatility. While they are less volatile than equities, external economic factors can still affect their market value, impacting liquidity and returns.

Treasury Notes Vs Bonds

The primary difference between Treasury Notes and Bonds in India is that Treasury Notes typically have shorter maturities, ranging from 2 to 10 years, while bonds have longer maturities, often exceeding 10 years.

AspectTreasury NotesTreasury Bonds
Maturity PeriodTypically 1 to 10 yearsTypically 20 to 30 years
Interest PaymentSemi-annual interest paymentsSemi-annual interest payments
Risk ProfileGenerally lower risk due to shorter maturityHigher risk due to longer maturity
YieldLower yield compared to bondsHigher yield due to longer maturity and increased risk
LiquidityGenerally more liquid due to shorter maturityLess liquid due to longer maturity
PurposeUsed for short to medium-term investment goalsSuited for long-term investment strategies
Market SensitivityMore sensitive to short-term interest rate changesMore sensitive to long-term economic trends
Investor SuitabilityAttractive to investors seeking stability and regular income over a shorter termPreferred by investors with a long-term investment horizon, seeking higher yields
Inflation ImpactLess exposed to inflation risk over the short termMore exposed to inflation risk over the long term

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Treasury Notes Meaning – Quick Summary

  1. Treasury Notes are medium-term government securities with maturities ranging from 1 to 10 years, offering regular interest payments and backed by the government, providing a safe and stable investment option.
  2. An example of a Treasury Note would be a 5-year Treasury Note issued by the government, providing semi-annual interest payments and the return of principal upon maturity.
  3. Purchasing Treasury Notes involves selecting the desired note, participating in auctions or buying through secondary markets, and managing the investment through its maturity.
  4. Treasury Notes offer safety, regular income, liquidity, portfolio diversification, inflation protection, accessibility, and potential tax benefits.
  5. The primary disadvantage of Treasury Notes is lower yields compared to other securities and high-interest rate risk.

Treasury Notes – FAQs

1. What is a Treasury note?

A Treasury note is a government debt security issued with a maturity of 1 to 10 years. Offering fixed interest rates, it provides semi-annual interest payments to investors. Treasury notes are considered a safe investment due to the government’s backing.

2. What is an example of a Treasury note?

An example of a Treasury note is a 5-year Indian Government Treasury Note. It offers a fixed interest rate and pays interest semi-annually. Upon maturity, investors receive the principal amount and the accrued interest.

3. What are the benefits of T notes?

The benefits of Treasury notes include safety, predictable interest income, and moderate liquidity. They are ideal for risk-averse investors, providing a balance between short-term and long-term investments, and are backed by the government’s creditworthiness.

4. Who issues treasury notes?

In India, Treasury notes are issued by the central government as part of its borrowing program. These notes are used to finance government spending and are a vital tool in managing the country’s fiscal policy.

5. What is the difference between a Treasury note and bill?

Treasury bills are short-term government securities with maturities of less than a year, while Treasury notes are medium-term, maturing between 1 to 10 years. 

6. Do Treasury notes have maturity?

Yes, Treasury notes have a defined maturity period, usually between 1 and 10 years. Upon maturity, the government repays the principal amount to the note holder and the final interest payment.

7. Are Treasury Notes Taxable?

Interest earned from Treasury notes in India is taxable as per the Income Tax Act. However, there are no capital gains taxes if the notes are held until maturity, making them a tax-efficient investment for some investors.

8. Are Treasury Notes A Good Investment?

Treasury notes are a good investment for those seeking stable and predictable returns with low risk. Given their government backing and regular interest payments, they are particularly suitable for conservative investors and diversifying investment portfolios.

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