How U.S. Treasury Securities Pay Investors

Treasury bills, or T-bills, generally earn interest through the difference between the amount paid for the bill and the face value Treasury pays at maturity. Bills do not make recurring coupon payments while they are held. The U.S. Treasury currently issues regular bills with maturities ranging from 4 to 52 weeks, and bills can be sold at a discount or at face value. The official Treasury Bills page explains that interest is paid when the bill matures.

The key payment pattern is therefore different from a Treasury note. A bill bought below face value creates its return mainly through a maturity payment rather than through periodic cash interest. If a bill with $1,000 face value were purchased for $980 and held to maturity, the simplified difference would be $20. That example illustrates the structure, not an expected auction price or investment return. Bills can also be sold before maturity, in which case the investor's actual result depends on the sale price rather than simply the original discount.

The distinction between discount, face value, and yield is especially important with bills. TreasuryDirect describes the face value, also called par value, as the amount paid at maturity. A bill's purchase price can be lower than par because Treasury bill auctions use discount-based pricing. Treasury's Understanding Pricing and Interest Rates page explains the mechanics.

A useful model is:

purchase below face value → no periodic coupon → face value paid at maturity → difference represents interest

That model should not be interpreted to mean that every bill is always issued below par. Treasury notes that a bill can also be issued at par.

Another common mistake is to treat a Treasury bill's quoted discount rate as though it were identical to a conventional coupon rate or every other yield measure. Treasury bill quotations use specific market conventions, including discount-rate conventions that can differ from annual percentage yield calculations used elsewhere.

The payment pattern and the quotation method are therefore separate questions:

1. Cash-flow question: When does the investor receive the economic return?
2. Pricing question: How was the bill's purchase price determined?
3. Yield question: Which annualized convention is being used to describe the return?

For a bill held to maturity, the essential cash-flow structure remains relatively simple:

purchase payment → holding period → face-value maturity payment

No semiannual coupon is required to create the bill's interest.

Treasury notes pay a fixed rate of interest every six months until maturity. Treasury currently issues notes with terms of 2, 3, 5, 7, and 10 years. When a note matures, Treasury pays the note's par amount in addition to the final scheduled interest payment. The official Treasury Notes page explains that the interest rate is fixed at auction and does not change during the note's life.

The fixed coupon rate does not mean the note's market value remains fixed. A Treasury note can trade above, below, or near par after issuance. Market yields, remaining maturity, and other market conditions can affect the price someone is willing to pay for the security. An investor who holds the note to maturity experiences a different cash-flow path from someone who sells it in the secondary market before maturity.

The note payment structure can be represented as:

purchase → interest every six months → interest every six months → ... → final interest + par at maturity

The coupon rate and the investor's yield should not be treated as interchangeable.

TreasuryDirect explains that notes can be auctioned at, above, or below par depending partly on the relationship between the note's fixed interest rate and the yield determined at auction. If market yield is greater than the coupon rate, the price can be below par. If market yield is lower than the coupon rate, the price can be above par.

This creates three related but distinct concepts:

A note's scheduled coupon can stay unchanged even while its market price moves.

For example, two investors could own the same Treasury note with the same coupon. One investor might have bought the note when it was originally auctioned, while another might have acquired it later at a different market price. The Treasury payment schedule attached to the security can remain the same even though the investors' purchase prices—and therefore their economic yields—differ.

Reopened Treasury notes provide another useful example. Treasury may issue an additional amount of an existing note rather than create an entirely new security. The reopening retains the existing security's maturity date and interest rate, but the purchase price can differ. In some reopenings, the purchaser may have to pay accrued interest as part of the purchase price. When that occurs, Treasury returns the accrued-interest amount as part of the security's first regular interest payment. TreasuryDirect explains this process in its Buying a Treasury Marketable Security guidance.

The core distinction is:

fixed coupon payment ≠ fixed market value ≠ identical yield for every investor

Understanding that separation makes Treasury note cash flows easier to interpret.

Treasury Inflation-Protected Securities, or TIPS, have principal that rises or falls with changes in the Consumer Price Index for All Urban Consumers, or CPI-U. TIPS also pay interest every six months at a fixed interest rate, but that fixed rate is applied to inflation-adjusted principal. As a result, the dollar amount of an interest payment can change even though the stated interest rate remains fixed. Treasury currently issues TIPS with 5-, 10-, and 30-year terms. See the official TreasuryDirect TIPS guide.

TIPS therefore contain two moving parts that should be separated. The interest rate is fixed, while the principal base used to calculate interest can change with inflation or deflation. When inflation raises adjusted principal, subsequent interest payments can increase because the same fixed rate is being applied to a larger principal amount. When deflation lowers adjusted principal, the calculated interest payment can decrease.

The conceptual relationship is:

fixed interest rate × inflation-adjusted principal → variable dollar interest payment

Treasury uses CPI-U data to make TIPS principal adjustments. TreasuryDirect publishes daily index ratios that translate the relevant inflation measure into adjusted principal values.

The payment sequence is different from both a conventional Treasury note and an I Bond:

purchase → principal adjusts → six-month interest payment → principal adjusts → six-month interest payment → maturity principal payment

At maturity, an important protection applies. Treasury pays the inflation-adjusted principal or the original principal, whichever is greater. This means cumulative deflation does not cause Treasury to redeem a TIPS held to maturity for less than its original principal amount.

That maturity protection should not be overgeneralized.

A TIPS investor who sells before maturity receives the market price available at that time. The market price can be affected by real interest rates, remaining maturity, inflation expectations, liquidity, and other market conditions. The original-principal maturity floor does not guarantee that an investor selling early cannot experience a loss.

Another important distinction is:

TIPS inflation adjustment ≠ separate inflation cash payment

Inflation generally changes the security's principal base. Treasury then applies the fixed coupon rate to that adjusted amount when calculating six-month interest.

Treasury describes the interest calculation conceptually as:

six-month interest payment = adjusted principal × one-half of the annual interest rate

The precise adjustment process uses official CPI reference values and index ratios rather than a simple annual inflation percentage entered once per year.

TIPS also have a tax characteristic worth understanding. TreasuryDirect notes that annual increases in TIPS principal can affect federal taxes even though the inflation adjustment is not necessarily distributed as a separate cash payment at that time. Tax treatment depends on applicable rules and account circumstances, so tax consequences should be evaluated separately from the security's cash-flow mechanics.

A useful three-part TIPS framework is:

1. Principal responds to CPI-U.
2. The coupon rate remains fixed.
3. Interest dollars respond to the changing principal base.

That combination is what distinguishes TIPS from ordinary fixed-principal Treasury notes.

Series I savings bonds earn interest through a combination of a fixed rate and an inflation rate. The fixed rate assigned when an I Bond is issued remains with that bond, while the inflation component changes every six months. Treasury combines the two components into a composite rate. Unlike Treasury notes and TIPS, I Bonds do not normally send investors periodic cash interest payments. Interest accumulates in the bond and is paid when the bond is redeemed or reaches final maturity. The official TreasuryDirect I Bonds guide explains this structure.

I Bonds earn interest monthly and compound semiannually. Every six months, accumulated interest is added to the bond's value, creating a new principal base for the next earning period. The composite rate can change every six months as the inflation component changes, while the bond's original fixed-rate component remains unchanged.

The basic pattern is:

fixed-rate component + changing inflation component → composite rate

followed by:

monthly interest accrual → semiannual compounding → growing bond value

The exact composite rate is not produced by simply adding an annual fixed rate to an annual inflation rate. Treasury uses a specific formula involving the fixed rate and the semiannual inflation rate. The current formula and rate history are available on TreasuryDirect's I Bonds Interest Rates page.

A major difference from TIPS is the form of the inflation adjustment.

With TIPS:

inflation changes principal directly, and cash interest is paid every six months

With I Bonds:

inflation affects the composite earnings rate, and earnings accumulate inside the savings bond

I Bonds also have different liquidity rules because they are savings bonds rather than marketable Treasury securities. An I Bond generally cannot be redeemed during its first 12 months. If it is redeemed before it is five years old, Treasury deducts the final three months of interest. After five years, that early-redemption interest penalty no longer applies. I Bonds can earn interest for as long as 30 years unless redeemed earlier.

The distinction between rate announcement date and rate change date for a particular bond is also important.

Treasury announces new fixed and inflation components in May and November, but an existing I Bond moves into a new six-month earning period based on its own issue month. A bond bought in one month therefore does not necessarily change its composite rate on the same calendar date as a bond issued in another month.

Another useful feature is the zero-rate floor. Treasury states that the composite rate on an I Bond cannot fall below zero. A sufficiently negative inflation component can reduce the composite rate, but Treasury does not allow the resulting composite rate to become negative.

The complete cash-flow logic is therefore:

purchase → monthly interest accrual → semiannual compounding → new six-month rate period → continued accumulation → redemption or maturity payment

This pattern makes an I Bond fundamentally different from a Treasury note that distributes cash interest every six months.