Definition
Treasury Securities
Debt obligations issued by the U.S. Department of the Treasury and backed by the full faith and credit of the U.S. government. Three types by maturity: Treasury bills (T-bills, up to 1 year), Treasury notes (T-notes, 2-10 years), and Treasury bonds (T-bonds, 10+ years, typically 20-30 years). Interest is subject to federal income tax but exempt from state and local taxes. Considered the risk-free benchmark for U.S. dollar-denominated investments.
A conservative investor might hold a 6-month T-bill for short-term cash needs, a 5-year T-note for intermediate savings, and a 20-year T-bond for long-term retirement income. All three provide government-guaranteed principal and interest.
Students often confuse the maturity ranges (T-bills vs. T-notes vs. T-bonds) and forget that Treasuries are federally taxable but state/local tax-exempt, the opposite of municipal bonds which are federally tax-exempt but may be state-taxable.
How is Treasury Securities tested on the exam?
- Distinguishing between T-bills, T-notes, and T-bonds based on maturity ranges
- Identifying that Treasuries are backed by full faith and credit of the U.S. government
- Understanding tax treatment: federally taxable but state/local exempt
- Calculating T-bill discount yield vs bond equivalent yield (BEY) and understanding BEY is always higher
- Recognizing Treasuries as the risk-free rate benchmark for other investments
Regulatory limits
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Treasury Bills (T-bills) maturity | Up to 1 year | Short-term; sold at discount, mature at par value |
| Treasury Notes (T-notes) maturity | 2-10 years | Intermediate-term; pay semiannual interest |
| Treasury Bonds (T-bonds) maturity | 10+ years (typically 20-30 years) | Long-term; pay semiannual interest |
Think of Treasury maturity ranges like people growing up: T-Bills = Baby (under 1 year old, no steady income yet - sold at discount). T-Notes = Teenager (2-10 years, starting to earn - pays interest). T-Bonds = Adult (10+ years, established income - pays interest). All backed by Uncle Sam's full faith and credit. Tax trick: Federally taxed but STATE-free (opposite of "muni" bonds).
Practice questions
Test your understanding with the questions below. Pick an answer to reveal the explanation.
Maria, a 55-year-old investor in the 35% federal tax bracket and 6% state tax bracket, needs to invest $100,000 for her daughter's college expenses in 8 years. She wants minimal credit risk and moderate interest rate risk. Which Treasury security would be most appropriate?
C is correct. A 7-year Treasury note matches Maria's 8-year time horizon most closely, minimizing reinvestment risk (from rolling over short-term securities) and interest rate risk (from holding long-term securities she'll need to sell before maturity). All Treasuries provide the minimal credit risk she wants.
A (6-month T-bill) creates significant reinvestment risk since she would need to reinvest 16 times over 8 years, exposing her to potentially lower rates. B (10-year note) creates liquidity risk: she would need to sell 2 years before maturity, exposing her to interest rate risk and potential principal loss if rates rise. D (30-year bond) has the highest interest rate risk and duration, making it unsuitable for an 8-year time horizon despite its higher yield.
The Series 65 exam tests your ability to match Treasury security maturities to client time horizons and risk tolerances. Understanding how maturity length affects reinvestment risk, interest rate risk, and liquidity is essential for suitable recommendations. Questions often present scenarios with specific future needs, testing whether you know to match bond maturity to the time horizon.
Which of the following correctly describes the maturity range for Treasury notes?
B is correct. Treasury notes (T-notes) have original maturities ranging from 2 to 10 years. They pay semiannual interest and are issued at or near par value.
A (up to 1 year) describes Treasury bills (T-bills), not notes. C (5-20 years) is incorrect as it overlaps with T-bonds and excludes shorter T-notes like the 2-year. D (10-30 years) describes Treasury bonds (T-bonds), which have maturities exceeding 10 years.
The Series 65 exam frequently tests knowledge of Treasury security maturity ranges. This is fundamental for understanding yield curves, recommending appropriate securities based on client time horizons, and recognizing duration characteristics. Questions may ask you to classify a security based on its maturity or determine which type would be most suitable for a specific investment period.
An investor purchases a $10,000 face value 182-day Treasury bill for $9,800. What are the approximate discount yield and bond equivalent yield (BEY) for this T-bill?
A is correct. Calculate both yields:
Discount Yield = (Discount ÷ Face Value) × (360 ÷ Days)
Discount Yield = ($200 ÷ $10,000) × (360 ÷ 182) = 0.02 × 1.978 = 3.96%
Bond Equivalent Yield (BEY) = (Discount ÷ Purchase Price) × (365 ÷ Days)
BEY = ($200 ÷ $9,800) × (365 ÷ 182) = 0.0204 × 2.005 = 4.09%
Key relationship: BEY is always higher than discount yield because (1) it divides by the smaller purchase price instead of face value, and (2) it uses 365 days instead of 360 days. Discount yield understates the true return.
B incorrectly reverses the two yields. C fails to annualize (shows only the 182-day return without the time adjustment). D uses 360 days for both calculations instead of using 365 days for BEY.
The Series 65 exam tests whether you understand that discount yield (based on face value, 360 days) understates the true return compared to bond equivalent yield (based on purchase price, 365 days). This distinction is critical for comparing T-bill returns to other investments that quote yields based on purchase price. The exam frequently tests this BEY > Discount Yield relationship and may ask you to calculate both or identify which is higher.
All of the following statements about Treasury securities are accurate EXCEPT
C is correct (the EXCEPT answer). Interest from Treasury securities is NOT exempt from federal income tax. This is a critical distinction: Treasuries are federally taxable but state/local exempt, which is the opposite of municipal bonds (federally exempt but potentially state-taxable).
A is accurate: all Treasury securities are backed by the full faith and credit of the U.S. government, giving them the highest credit quality. B is accurate: Treasury interest is exempt from state and local income taxes, making them particularly attractive to investors in high-tax states. D is accurate: Treasuries are widely used as the risk-free rate benchmark because of their government backing and deep, liquid markets.
The Series 65 exam tests your ability to distinguish tax treatment across different fixed-income securities. Understanding that Treasuries are federally taxable (unlike municipal bonds) but state/local exempt (like municipal bonds) is essential for tax planning and suitability recommendations. Questions often compare the after-tax returns of Treasuries versus municipal bonds for clients in different tax situations.
An adviser is comparing investment options for a client. Which of the following characteristics apply to Treasury bills (T-bills)?
1. Sold at a discount and mature at par value
2. Pay semiannual interest
3. Have maturities up to 1 year
4. Have the highest duration of all Treasury securities
A is correct. Only statements 1 and 3 accurately describe Treasury bills.
Statement 1 is TRUE: T-bills are zero-coupon securities sold at a discount to face value and mature at par. The difference between purchase price and par value represents the investor's return.
Statement 2 is FALSE: T-bills do NOT pay semiannual interest. They are zero-coupon securities. T-notes and T-bonds pay semiannual interest, but T-bills do not.
Statement 3 is TRUE: T-bills have maturities up to 1 year (commonly 4-week, 13-week, 26-week, and 52-week).
Statement 4 is FALSE: T-bills have the LOWEST duration of Treasury securities due to their short maturities. Longer maturity T-bonds have the highest duration and greatest price sensitivity to interest rate changes.
The Series 65 exam tests detailed knowledge of how different Treasury securities work. Understanding that T-bills are zero-coupon discount instruments distinguishes them from interest-paying T-notes and T-bonds. This affects tax treatment (all gain at maturity vs. semiannual interest), reinvestment risk, and duration characteristics. Questions often require comparing the three Treasury types across multiple dimensions.
What concepts relate to Treasury Securities?
This term is part of this cluster :
Where does Treasury Securities appear on the Series 65 exam?
This term is tested in the following Series 65 exam topics:
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