Treasury Notes

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

Interest-bearing company obligations of the U.S. government with intermediate maturities of not less than one year or more than ten years (the latter was changed in 1976 – prior maximum maturities were seven years).

Treasury notes are issued in minimum denomination of $5,000 if maturity is less than four years, and $1,000 if maturity is four years or more.  Definitive securities were also issued in denominations of $10,000, $100,000, and $1,000,000.  Interest rates vary from issue to issue.

Notes are now in book-entry form.  Notes issued before January 1, 1983 , are in coupon, registered, and book-entry forms.  Notes issued from January 1, 1983 , to August 14, 1986 , are in registered and book-entry forms.  STRIPS are in book-entry form.

On February 15, 1985 , the Department of the Treasury initiated STRIPS (Separate Trading of Registered Interest and Principal of Securities) for notes authorized therefore by the terms of their issue.  This program, which grew out of large demand for “stripped” Treasury securities, provides a more efficient treading method for the zero-coupon market and thus lowers the cost of financing the public debts.  STRIPS enables depositary financial institutions that maintain book-entry securities accounts at Federal Reserve banks to request that eligible securities accounts be separated into their component parts (principal and interest).  In general, Treasury plans to make the STRIPS program available for new securities with ten or more years of original maturity.  Other securities with this feature are noted in the Monthly Statement of the Public Debt.  On May 1, 1987 , the Treasury began the reconstitution of securities within the STRIPS program.  Reconstitution is the reassembly of a STRIPS book-entry security into a fully constituted book-entry security after it has been previously separated into its principal and interest components.

Statutory authority for Treasury Notes is found in 31 U.S.C. 3102, 3121.  Governing regulations are found in Department Circular No. 300, as revised (31 CFR, Part 306), Department Circulars, Public Debt Series No. 2-86 (31 CFR, Pat 357), for notes issued in Treasury Direct, subject to provisions of the individual offering circular for each issue.

Under the Treasury’s program of regular issuance of its basic types of debt issues (bills, notes, and bonds), the usual rotation has called for two-year notes to be auctioned about one week before the end of every month; four-year notes, about the last month of every quarter; and five-year notes, about the middle of the second month of each quarter.  Three-year notes occasionally have been used in refunding packages about the middle of a quarter and seven-year and ten-year notes offered as options in quarterly refundings, dated midmonth.  In advance of such quarterly refundings, the Treasury has adopted the practice of indicating its cash needs for the quarter and the types of financing being considered, a practice which permits orderly market adjustment and investment planning.  They are subject, to full federal taxation (income, capital gains, estate, and gift taxes).

The TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF 1982 requires Treasury notes issued after December 31, 1982 , to be in registered or BOOK ENTRY form.

During World War II, the Treasury did not resort to note financing importantly, relying largely on bills and certificates of indebtedness.  Beginning in 1949, the Treasury resumed important issuance of notes, particularly as a means of lengthening maturity of the public debt into the intermediate range, and meeting demand from commercial banks and other institutional investors for spacing of maturities beyond the short-term range.  

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