Treasury Note Interest Payment

Markiepost | Oct 6, 2023 | 26 posts since 2023

Okay, I'm a bit of a dunce here, but, I'm considering purchasing a 2 year T-Note. I realize interest is paid every 6 months. My question, Is the interest paid to the Note and when it matures, I receive the purchase price plus interest or can I have the interest paid to a secondary account every 6 months until the Note matures?

Thank you for any guidance!

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Answers

CuriousDave | Oct 6, 2023 | 233 posts since 2018

The interest is paid to the owner every 6 months. Unlike shorter dated T-Bills, interest does not accrue to the Note. If you do not need the income, you will want an account to receive the payments every 6 months, such as a high yield savings or money market account. If you happen to have an add-on CD that has at least 2 years to go that has a decent rate, that may be a good alternative for depositing the interest payments.

Markiepost | Oct 6, 2023 | 26 posts since 2023

Thank you! For the life of me, I could not find a concise answer, yours is just what I needed.

Ltssharon | Oct 12, 2023 | 471 posts since 2020

Beware of Schwab Treasuries because I believe the interest will go every 6 months into what they call your "settlement " account, which will not earn any interest. Therefore every 6 months you will want to move that interest from the "settlement" account into something that pays interest.

Also at Schwab, anyway, the "yield to maturity" is a misleading title, because it ASSUMES that you are able to reinvest immediately that interest which you receive every 6 months, earning (I maybe be mistaken) at least the coupon rate.

Over6T | Oct 13, 2023 | 31 posts since 2012

Do you have a reference that confirms this:
"at Schwab, anyway, the "yield to maturity" is a misleading title, because it ASSUMES that you are able to reinvest immediately that interest which you receive every 6 months, earning (I maybe be mistaken) at least the coupon rate."

Ltssharon | Oct 13, 2023 | 471 posts since 2020

No, it was an explanation from a fixed income broker at Schwab. He used the wording "somewhat misleading". But I do know the coupon payment just goes to my non interest bearing "settlement" account. Also a knowledgeable relative confirmed this with me. Thank you for the forum thread to bring up this. I am just happy to know about this so I can chose my course of action with my investments.

MAKNYC | Oct 13, 2023 | 323 posts since 2015

Yield to Maturity is a standardized calculation. Schwab’s usage of the calculation is no different than any other broker, trader or advisor. Similar to other financial measures (mutual fund expenses, APY, IRR) it is meant to help compare various options to one another. It is not perfect and has limitations, including the assumption you mention, but it’s standardized across platforms and instruments and brokers.

As for the comment about the settlement account, that is likely wrong, unless you have some untraditional account type. At Schwab all standard accounts (Schwab One, brokerage, IRA) are by default assigned to the bank sweep program. Funds are deposited to Schwab Bank. That rate is criminally low, currently .45%, but not zero. You also would have the option of choosing the Schwab One interest feature where the excess funds stay at Schwab (brokerage) and earn interest, and that rate has always been the same as Schwab Bank. The advantage of that option is purely for margin purposes. Like you mention, at Schwab, to receive market rates on excess cash, the investor needs to purchase a money market fund. Schwab ceased offering sweep MMF around 2018, and that decision is what they are paying the price for now with their unrealized bond losses.

GH1 | Oct 13, 2023 | 1,053 posts since 2017

Same on cds at schwab you need to move the interest and money into a new one or buy into the money market after wards. Or your earning zero. Fidelity is different goes to a money market account. Your money is always earning. I wish schwab would fix this

Ltssharon | Oct 13, 2023 | 471 posts since 2020

Continued: But since you brought up references I googled the assumptions behind yield to maturity for treasuries:
Assumption #1 ? The return assumes the bond investor held onto the debt instrument until the maturity date. Assumption #2 ? All the required interest payments and principal repayment were made on schedule. Assumption #3 ? The coupon payments were reinvested at the same rate as the yield-to-maturity (YTM).

Anybody else at schwab care to confirm or deny this with respect to, say, 10 year treasuries? I welcome knowledge for sure.

Over6T | Oct 13, 2023 | 31 posts since 2012

I've been buying treasuries at schwab, not a bond expert, but it seems to me that your #3 assumption doesn't sound right. But the more I think about it... perhaps this is correct.
This assumption seems to imply that a bond holder only realizes the "advertised/stated" YTM by accumulating and compounding the periodic coupon payments. That hasn't been my understanding, and I certainly could be wrong!

CuriousDave | Oct 13, 2023 | 233 posts since 2018

For what it’s worth, here are two select paragraphs about YTM on Investopedia:
“YTM is essentially a bond’s internal rate of return if held to maturity.”
“Calculating the yield to maturity can be a complicated process, and it assumes all coupon or interest payments can be reinvested at the same rate of return as the bond.”
The site also notes that the YTM excludes any (downward) adjustment for income taxes.

Over6T | Oct 14, 2023 | 31 posts since 2012

OK, I'm a believer, I see how this works.
Where this gets even more complicated is buying a secondary treasury with a coupon of, say 2%, discounted purchase price, and a YTM, say, of 5%. In that scenario, the 2% coupon payment could be invested in a MM account, of say, 4% - resulting in a higher YTM than initially stated.

Ltssharon | Oct 14, 2023 | 471 posts since 2020

Over6T,
I was thinking that in the scenario you presented, since 4% MM is Less than the YTM of 5%, a person would end up with a LESSER YTM than initially stated, even taking into consideration the discounted purchase price. I am quite interested in this discussion because I did just purchase a 10 year secondary market treasury from Schwab.

MAKNYC | Oct 14, 2023 | 323 posts since 2015

All 3 of your assumptions here are correct. And this would apply to any type of bond….treasuries, corporate, municipal, convertible. It also wouldn’t matter whether said bond was purchased as a new issue (primary/auction) or in the secondary market. (Note that any transaction costs if any apply would need to be included in the purchase prices to calculate a correct YTM). YTM would however completely ignore tax differences between the various security types, so earning a 5% YTM on a U.S. Treasury would tend to be considered inferior to a 5% similarly risk rated and maturity date municipal bond where 100% of the interest payment could be free of all tax assessment.

For someone that absolutely needs to earn the YTM that they are buying the solution, while limited, is to buy a zero coupon bond, which can be done with Treasuries. That avoids the problem of reinvesting periodic coupon payments. A U.S. Treasury Bill is a simple zero coupon bond, but such instruments are created for further out maturities as well.

Ltssharon | Oct 14, 2023 | 471 posts since 2020

Hi Maknyc,
Thank you for continuing to follow this thread, even though your first response should have cleared things up, at my level of knowledge it did not. I am so proud that I thought to google "assumptions....." which helped. The 10 year treasury I bought at Schwab will be a real pain in the butoosie. But every 6 months I shall transfer it to a money market. Of course the money market rate may go down.

Well, I suppose now I should put some effort into learning about that which you call "zero coupon bond". I bought the 10 year secondary market treasury at schwab, which is apparently not the same thting you refer to in your last sentence.

Anyway, thank you. I enjoy reading your comments.

Over6T | Oct 15, 2023 | 31 posts since 2012

This thread certainly showed me that I'm never too old to learn new stuff!
Now I'm beginning to rethink just exactly what the equivalence is between a CD's APY and the YTM of a secondary treasury. It's not as apparent as one might think.
Thanks to you'all for the education.

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