Treasury note question?

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Topic Author
Oilcans
Posts: 49
Joined: Tue Mar 27, 2018 12:50 pm

Treasury note question?

Post by Oilcans »

:oops: In August of 2018 I purchased a T-Note thinking it was a wise move. Now I am questioning why I did it.
The settlement date was 8-10-2018, coupon rate 1.625%, maturity date 07/31/2020, yield to maturity, 2.65%. I paid $98.042 per bond for a principal amount of $98,042 plus interest of $44.16 for a total settlement amount of $98,086.16.

Today I received my first SA interest payment of $812.50. After doing some simple calculations, I think I would have been ahead by buying a one year CD. Guess maybe I was looking at the yield to maturity of 2.65% when I purchased it.

Maybe someone can enlighten me as to how the interest works on a T-Note. Even by reinvesting the interest I don't think I could do as well as a CD.

Thanks.
Grt2bOutdoors
Posts: 23368
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Treasury note question?

Post by Grt2bOutdoors »

Oilcans wrote: Thu Jan 31, 2019 11:39 am :oops: In August of 2018 I purchased a T-Note thinking it was a wise move. Now I am questioning why I did it.
The settlement date was 8-10-2018, coupon rate 1.625%, maturity date 07/31/2020, yield to maturity, 2.65%. I paid $98.042 per bond for a principal amount of $98,042 plus interest of $44.16 for a total settlement amount of $98,086.16.

Today I received my first SA interest payment of $812.50. After doing some simple calculations, I think I would have been ahead by buying a one year CD. Guess maybe I was looking at the yield to maturity of 2.65% when I purchased it.

Maybe someone can enlighten me as to how the interest works on a T-Note. Even by reinvesting the interest I don't think I could do as well as a CD.

Thanks.
Interest earned on Treasury securities are tax exempt at the state/local level. How do you figure you would come out ahead with a fully taxable CD with a 1 year maturity? In August what was the yield to maturity on a 1 year CD? Was it higher than 2.65%? How much higher on an after-tax basis?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
Oilcans
Posts: 49
Joined: Tue Mar 27, 2018 12:50 pm

Re: Treasury note question?

Post by Oilcans »

I don't know exactly what the rate on a CD would have been in August but here is what I'm looking at. I will receive two SA interest payments of $812.50 which total $1,625 per year. Divide this by my investment of $98,086.16 = 1.65% interest. Even after taking into consideration state tax-exemption on the bond I think the CD would do better. But more than that I'm wondering how you arrive at the 2.65% which is the YTM? After reinvesting the interest it wouldn't work out to 2.65%.

This is probably an easy question but It's just not clear to me how to arrive at the 2.65%?

Thanks for your response Grt2bOutdoors.
MikeG62
Posts: 3570
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Treasury note question?

Post by MikeG62 »

Oilcans wrote: Thu Jan 31, 2019 1:34 pm I don't know exactly what the rate on a CD would have been in August but here is what I'm looking at. I will receive two SA interest payments of $812.50 which total $1,625 per year. Divide this by my investment of $98,086.16 = 1.65% interest. Even after taking into consideration state tax-exemption on the bond I think the CD would do better. But more than that I'm wondering how you arrive at the 2.65% which is the YTM? After reinvesting the interest it wouldn't work out to 2.65%.

This is probably an easy question but It's just not clear to me how to arrive at the 2.65%?

Thanks for your response Grt2bOutdoors.
You are leaving out that when the bond matures you will get back $100,000. So the discount element of nearly $2,000 needs to be amortized into the yield as well. At a very high level, juice the annual return by $1,000 and re-do the math. You'll get much closer to the 2.65% annualized

Keep in mind the state tax savings too.
Real Knowledge Comes Only From Experience
Topic Author
Oilcans
Posts: 49
Joined: Tue Mar 27, 2018 12:50 pm

Re: Treasury note question?

Post by Oilcans »

Wow. How could I have overlooked the $100,000 at maturity? Now it makes sense why I purchased it in the first place.

Thanks Mike G62 for pointing out the obvious!
increment
Posts: 512
Joined: Tue May 15, 2018 2:20 pm

Re: Treasury note question?

Post by increment »

You bought a bond with a "1.65% coupon". That means that you should expect to receive 1.65% (of $100000) every year, which seems to be in agreement with what you are getting.
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