Two Year T-Note Questions

Submitted by Educational_Sir3783 t3_yimoz2 in personalfinance

Hello, Apologies for the noob question. Two year T-notes recently auctioned and issued at an interest rate of 4.375%. The price per $100 was $99.839071.

My two questions are:

  1. Does the interest rate mean a total annual return of 4.375% will apply both years? If so, is this 4.375% of $100 or $99.839071?

  2. Say $10,000 was purchased. This would cost $9,983.39. Excluding the semi-annual payment, at maturity would one receive $10,000 or just the principal ($,9,983.39)

Thank you all very much

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Werewolfdad t1_iujdwd8 wrote

> Does the interest rate mean a total annual return of 4.375% will apply both years? If so, is this 4.375% of $100 or $99.839071?

No, since the bond sold at a discount the yield to maturity will be slightly higher than the coupon

> Say $10,000 was purchased. This would cost $9,983.39. Excluding the semi-annual payment, at maturity would one receive $10,000 or just the principal ($,9,983.39)

You are paid face value

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Educational_Sir3783 OP t1_iuje8fr wrote

Thank you for your reply. I can work on doing some math but essentially this means the return would be higher than 4.375% annually, correct?

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Knipfty t1_iujqjdl wrote

The 2-yr T Note will pay the coupon twice a year on the last day of the month. If it were recently auctioned that would mean it settled today. So it pays coupons on Apr 30 and Oct 31. If those dates fall only a weekend or holiday, you will receive payment on the next business day.

10,000*4.375%/2 = 218.75

At maturity, you will receive 10,000 plus the last coupon payment. or 10,218.75.

Lastly you will owe federal taxes (no state income taxes) on each coupon payment in the year received and the difference between what you paid for the T Note and it's face value at maturity.

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