How does a 2 year treasury note work?
There is a large market where notes/bills/bonds are traded, so yes you can sell them later.  However, if interest rates go up, the value of any bond that you want to sell goes down, because you now have to compete with what someone can get on a new issue, so you need to 'discount' the principal value of your bond in order for someone to want to buy it instead of a new bond that has a higher interest rate. The reverse applies if interest rates fall (although it's hard to get much lower than they are now).  So someone wanting to make money in bonds due to interest rate changes, generally wants to buy at higher interest rates, and then sell their bonds after rates have gone down.  See my answer in this question for more detail Why does interest rate go up when bond price goes down? To answer 'is that good' the answer depends on perspective: Look at this question here. In my answer there, I put a link to an Investopedia article about the bond prices. Keep in mind that speculating over a short term period is pretty dangerous, even with the Treasury notes, and the prices may be affected temporary but greatly by the ordeals like the latest Republican shenanigans in Washington. Notes and Bonds sell at par (1.0). When rates go up, their value goes down. When rates go down, their value goes up. As an individual investor, you really don't have any business buying individual bonds unless you are holding them to maturity. Buy a short-duration bond fund or ETF.
I have been charting the CPI reported inflation rate vs . the yeald on the 10-year T-note. Usually, the two like to keep pace with each other. Sometimes the T-note is a bit higher than the inflation rate, sometimes the inflation rate is a bit higher than the T-note yeald. One does not appear to follow the other, but (until recently) the two do not diverge from each other by much.  But all that changed recently and I am without an explanation as to why. Inflation dropped to zero (or a bit negative) yet the yeald on the 10-year T-note seemed to seek 2%.  Edit: If you give this response a downvote then please be kind enough to explain why in a comment.  Edit-2: CPI and 10-year T-note are what I have tracked, and continue to track. If you do not like my answer then provide a better one, yourself. "A $1 note and four quarters are both real money, but how (and when) they become real money is different. The important thing is that the Fed's stockpile of cash that it gets from the Bureau of Engraving and Printing isn't ""real money"" (i.e. M0) yet. That cash is only used for fulfilling withdrawals from reserve accounts. You can't use it to buy a car, or a house, or to pay Janet Yellen's salary...no one, not even Janet, can use even a single dollar to buy a Diet Coke. In other words, it's not really an asset. Or a liability. Or anything but a stack of paper in the Fed's vaults that looks astonishingly like money, but isn't. The upside to this is that when the BEP makes a delivery of fresh bills to the Fed, or when the Fed destroys old, ratty bills that aren't usable anymore, the Fed's balance sheet doesn't change. That's good! Those are practical considerations, not financial ones. The downside is that there's nothing on the asset side of the sheet to explain how the Fed's liability to a bank is reduced when the bank makes a cash withdrawal from its reserve account. So the Fed balances it's balance sheet by recording an increase in a different liability: the cash in circulation. Kinda like transferring the balance on a credit card: you're paying down one liability by increasing another one. It looks a bit silly, but less silly than recording the destruction of old bills as an ""expense"" of the face value of the bills. Coins, on the other hand, become money as soon as the Treasury gets them from the Mint. If they wanted to, they could pay their employees' salaries by ordering coins from the Mint for cheap, giving them to their employees at face value, and reaping fat profits as a result. In fact, that's pretty much exactly what they do: when someone wants quarters, the Treasury mints them at less than face value and then sells them at face value. In practice the Fed does all of this buying and then distributes the coins according to demand. The important thing is that this bunch of coins is not like the Fed's stockpile of bills. It's already real money, and therefore shows up as an asset. Not much. If the Fed bought coins at the cheaper price from the Mint instead, stockpiled them like they stockpile bills, then distributed them as usual, the extra profit just goes to the Treasury anyway, like all the Fed's profit does. However, as things are, the Fed's purchases of coins are recorded on the Fed's balance sheet at face value, which is kinda silly." "Its definitely not a stupid question. The average American has absolutely no idea how this process works. I know this might be annoying, but I'm answering without 100% certainty.   The Fed would increase the money supply by buying back government bonds. This increased demand for bonds would raise their price and therefore lower the interest return that they deliver. Since U.S. treasury bonds are considered to be the very safest possible investment, their rate is the ""risk free"" rate upon which all other rates are based. So if the government buys billions of these bonds, that much money ends up in the hands of whoever sold them. These sellers are the large financial organizations that hold all of our money (banks and large investment vehicles). Now, since bond rates are lower, they have an incentive to put that money somewhere else. It goes into stocks and investment in business ventures.   I'm less certain about how this turns into inflation that consumers will recognize. The short answer is that there is only a finite number of goods and services for us to buy. If the amount of money increases and there are still the same number of goods and services, the prices will increase slightly.   Your question about printing money to pay off debts is too complex for me to answer. I know that the inflation dynamic does play a role. It makes debts easier to pay off in the future than they seem right now. However, causing massive inflation to pay off debts brings a lot of other problems." For the US government, they've just credited Person B with a Million USD and haven't gained anything (afterall, those digits are intangible and don't really have a value, IMO). Two flaws in this reasoning: The US government didn't do anything. The receiving bank credited the recipient. If the digits are intangible, such that they haven't gained anything, they haven't lost anything either. In practice, the role of governments in the transfer is purely supervisory. The sending bank debits the sender's account and the receiving bank credits the recipient's account. Every intermediary makes some money on this transaction because the cost to the sender exceeds the credit to the recipient. The sending bank typically receives a credit to their account at a correspondent bank. The receiving bank typically receives a debit from their account at a correspondent bank. If a bank sends lots of money, eventually its account at its correspondent will run dry. If a bank receives lots of money, eventually its account at its correspondent will have too much money. This is resolved with domestic payments, sometimes handled by governmental or quasi-governmental agencies. In the US, banks have an account with the federal reserve and adjust balances there. The international component is handled by the correspondent bank(s). They also internally will credit and debit. If they get an imbalance between two currencies they can't easily correct, they will have to sell one currency to buy the other. Fortunately, worldwide currency exchange is extremely efficient. "It's a form of debt issued by the United States Treasury. As the name implies, a 10-year note is held for 10 years (after which you get the face value in cash), and it pays interest twice per year. It's being used in the calculator to stand for a readily available, medium-term, nearly risk-free investment, as a means of ""discounting"" the value that the company gains. The explanation for why the discounting is done can be found on the page you linked. As a Canadian you could use the yield of comparable Canadian treasury securities as quoted by Bank of Canada (which seem to have had the bottom fall out since the new year), although I don't suppose American notes would be hard for a Canadian investor to come by, so if you wanted to be conservative you could use the US figure as long as it's higher." "Total Capital This is a very old fashioned term that really is mostly only used in the finance industry today, like when everyone was obsessed with ""bank capital"". Total Capital = Preferred Equity + Common Equity + Liabilities True blue preferred shares are almost only used by financial companies, banks specifically.  The more modern ones that convert to common are used by all other companies. Notes Payable This is another old fashioned term that now carries a different meaning in Generally Accepted Account Principles (GAAP). The oldest definition of a note or a promissory note is a promise to pay a fixed amount of money on a specific date.   This has been modified to resemble more a bond and evolved into the zero coupon bond, a bond that makes no cash interest payments but makes one final payment that includes principal & interest.   A bank note, like a One Dollar bill, is a note that pays something, in this case One Dollar, never (technically, the repayment date is simply not specified in the contract).  While it pays One Dollar, it never pays it back, so it has a constant value of One Dollar.  The constant nature, inflation notwithstanding, is what makes bank notes the preferred medium of exchange. GAAP has taken its' own definition to mean any debt payable within 12 months, as it is a current (<12 months) liability." Sure thing -  Treasuries Bonds/Bills are what the US Gov uses to borrow. However it's slightly different than taking out a loan. It's basically an agreement to give (repay) a set sum of money at a certain time in the future in exchange for a sum of funding that's determined by market forces (supply &amp; demand). The difference between today's price and the payment in the future is the interest.   For example (completely made up numbers):  - Today is 08/05/2017 - The government issues a bond that say it will pay who ever owns this bond $105 on 08/05/**2018** - The market decides that $105 from the US government paid a year from now is worth $100 today.   In other words the US Government is borrowing for one year at a rate of 5%       (105 - 100) / 100 = .05 = 5%  Now consider Saudi Arabia's petroleum company, Aramco.  Because petroleum is traded in dollars, when Aramco makes a sale, its paid in USD. Some of that is going to be reinvested into the company, some paid out in dividends to share holders but inevitably some of that will be saved someplace where it can make interest. Because treasuries are traded/issued in dollars and because Aramco's businesses deals primarily in dollars, treasuries are the natural place to store that savings, especially because the market considers them extremely safe.   If they exchange the USD into the Saudi currency to store the money in Saudi assets, Aramco is subject to  *exchange rate risk*. If the riyal depreciates relative to the dollar, Aramco will lose wealth on the exchange back to dollars when they go to move those funds back into their business. It's in their interest to deal with assets denominated in USD (i.e. T-Bonds) in order to avoid this.  So now because the Saudis want T-Bonds as well, the additional demand pushes the market price of our bond from $100 to $102. And the effective one year borrowing rate for the Government goes from 5% to 2.9%.      (105 - 102)/102 = .029411 = 2.9%  And there you have it, cheaper borrowing. It's also worth noting how this encourages business around the world to deal in dollars which are directly controlled by the federal reserve. This makes the US's position extremely powerful. The yield on treasury bond indicates the amount of money anyone at can make at virtually zero risk.   So lets say banks have X [say 100] amount of money. They can either invest this in treasury bonds and get Y% [say 1%] interest that is very safe, or invest into mortgage loans [i.e. lend it to people] at Y+Z% [say at 3%]. The extra Z% is to cover the servicing cost and the associated risk. (Put another way, if you wanted only Y%, why not invest into treasury bonds, rather than take the risk and hassle of getting the same Y% by lending to individuals?) In short, treasury bond rates drive the rate at which banks can invest surplus money in the market or borrow from the market. This indirectly translates into the savings & lending rates to the banks' customers. You've got the right idea, except that the stated interest rate is normalized for a 1-year investment.  Hence if you buy a 4-week bill, you're getting something closer to 4/52 of what you've computed in your question.  More precisely, the Treasury uses a 360 day year for these calculations, so you multiply the stated rate by (number of days until maturity)/360 to get the actual rate of return. "The simple answer is that, even though mortgages can go for 10, 15, 20 and 30 year terms in the U.S., they're typically backed by bonds sold to investors that mature in 10 years, which is the standard term for most bonds. These bonds, in the open market, are compared by investors with the 10-year Treasury note, which is the gold standard for low-risk investment; the U.S. Government has a solid history of always paying its bills (though this reputation is being tested in recent years with fights over the debt ceiling and government budgets). The savvy investor, therefore, knows that he or she can make at least the yield from the 10-year T-note in that time frame, with virtually zero risk. Anything else on the market is seen as being a higher risk, and so investors demand higher yields (by making lower bids, forcing the issuer to issue more bonds to get the money it needs up front). Mortgage-backed securities are usually in the next tier above T-debt in terms of risk; when backed by prime-rate mortgages they're typically AAA-rated, making them available to ""institutional investors"" like banks, mutual funds, etc. This forms a balancing act; mortgage-backed securities issuers typically can't get the yield of a T-note, because no matter how low their risk, T-debt is lower (because one bank doesn't have the power to tax the entire U.S. population). But, they're almost as good because they're still very stable, low-risk debt. This bond price, and the resulting yield, is in turn the baseline for a long-term loan by the bank to an individual. The bank, watching the market and its other bond packages, knows what it can get for a package of bonds backed by your mortgage (and others with similar credit scores). It will therefore take this number, add a couple of percentage points to make some money for itself and its stockholders (how much the bank can add is tacitly controlled by other market forces; you're allowed to shop around for the lowest rate you can get, which limits any one bank's ability to jack up rates), and this is the rate you see advertised and - hopefully - what shows up on your paperwork after you apply." The way it actually works is that low-but-steady inflation (ie: printing of new dollars without any debt behind them) keeps the debts serviceable.  In real life, unfortunately, too little of the money supply is printed rather than lent into existence. An expiration 2 years out will have Sqr(2) (yes the square root of 2!) times the premium of the 1 year expiration. So if the option a year out sell for $1.00, two is only $1.41.  And if the stock trades for $10, but the strike is $12, why aren't you just waiting for expiration to write the next one? "Thanks!  Do you know how to calculate the coefficients from this part?:  ""The difference between the one-year rate and the spread coefficients represents the response to a change in the one-year rate. As a result, the coefficient on the one-year rate and the difference in the coefficients on the one-year rate and spread should be positive if community banks, on average, are asset sensitive and negative if they are liability sensitive. The coefficient on the spread should be positive because an increase in long-term rates should increase net interest income for both asset-sensitive and liability-sensitive banks.""  The one-year treasury yield is 1.38% and the ten-year rate is 2.30%.  I would greatly appreciate it if you have the time!" Yes, you are. When someone is bankrupt their assets are being sold to satisfy the creditors. Your note is an asset, and will be sold. You'll be making payments to the entity that buys it. As no one has mentioned them I will...  The US  Treasury issues at least two forms of bonds that tend to always pay some interest even when prevailing rates are zero or negative.  The two that I know of are TIPS and I series bonds. Below are links to the descriptions of these bonds: http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm