Which of the following statements about U.S. Treasury instruments is true?

• A. Interest from U.S. Treasury instruments is subject to state and local taxes.
• B. U.S. Treasury bonds typically mature in less than one year.
• C. U.S. Treasury notes do not pay periodic interest to investors.
• D. U.S. Treasury bills are short-term debt securities that mature in one year or less.

Answer: (D)

Verified step by step guidance

1. Understand the different types of U.S. Treasury instruments: Treasury bills, Treasury notes, and Treasury bonds. Each has distinct characteristics regarding maturity, interest payments, and tax implications.
2. Review the definition of Treasury bills: These are short-term debt securities issued by the U.S. government that mature in one year or less. They are sold at a discount and do not pay periodic interest; instead, the investor earns the difference between the purchase price and the face value at maturity.
3. Clarify the tax treatment of U.S. Treasury instruments: Interest earned from U.S. Treasury securities is exempt from state and local taxes but subject to federal taxes.
4. Examine Treasury notes: These are medium-term securities that typically mature in 2 to 10 years and pay periodic interest (semiannually) to investors.
5. Analyze Treasury bonds: These are long-term securities that mature in more than 10 years and also pay periodic interest (semiannually).