Note

A note is a written promise to repay borrowed money with interest by a specified date. Functionally similar to a bond, notes are debt securities that typically occupy the middle ground between short-term bills and longer-term bonds. They are used for personal loans, corporate financing, government borrowing, and structured investment products.

How notes work

• The borrower (issuer) agrees to pay the lender (investor) periodic interest and return the principal at maturity.
• Maturity, interest rate, and other terms are defined in the note. Notes generally have shorter maturities than many bonds.
• Some notes are simple loan agreements (e.g., promissory or demand notes); others are packaged or securitized (e.g., mortgage-backed notes) or enhanced with derivative features (structured notes).

Common types of notes

Treasury notes (T-notes)

• Issued by the U.S. government and considered low-risk.
• Pay interest semiannually and return principal at maturity.
• Typical maturities: 2, 3, 5, 7, and 10 years.
• Viewed as safe-haven investments because they are backed by the U.S. Treasury.

Municipal notes

• Issued by state and local governments to raise short-term funds for projects.
• Often mature in one year or less and may offer state and/or federal tax-exempt interest.
• Used to smooth timing gaps for public infrastructure and construction financing.

Unsecured notes

• Corporate debt without collateral backing.
• Often issued for terms of several years and carry higher interest rates to compensate for greater credit risk.
• If the issuer defaults or is liquidated, unsecured noteholders are lower in the priority ladder and may recover little.

Promissory notes

• A written promise from one party to repay a specific amount to another under agreed terms (schedule, rate, payee).
• Common for personal loans, private lending, and business receivables.
• Terms may specify who receives payments (e.g., the original lender or a third party).

Convertible notes

• Used in early-stage financing when valuation is uncertain.
• Start as debt and convert into equity upon a defined trigger (such as a later priced funding round).
• Often include provisions such as conversion discounts or valuation caps to reward early investors.

Structured notes

• Combine a debt instrument (typically a bond) with a derivative component tied to an underlying asset (equity index, commodity, etc.).
• Can offer enhanced return profiles but bring added complexity, credit exposure to the issuer, and derivative risk.

Mortgage-backed and other securitized notes

• Pools of loans (e.g., mortgages) are bundled and sold as securities that pass through principal and interest to investors.
• Returns depend on the performance of the underlying loans and carry prepayment and credit risks.

Other examples

• Demand notes: repayable on-demand without a fixed schedule.
• Capital notes: often unsecured corporate debt with specific roles in capital structures.

Tax considerations

• Municipal notes may provide tax-exempt interest at the federal and/or state level, making them attractive for taxable investors.
• Tax treatment varies by note type, issuer, and investor residency; review tax implications before investing.

Benefits and risks

Benefits:
– Income generation through interest payments.
– Range of risk/return profiles—from low-risk government T-notes to high-yield unsecured or structured products.
– Flexibility: used for personal loans, corporate finance, and investment strategies.

Risks:
– Credit/default risk: issuer may be unable to repay principal and interest.
– Interest-rate risk: note prices fall when market rates rise.
– Liquidity risk: some notes may be hard to sell before maturity.
– Complexity and hidden risks in structured and securitized notes.
– Limited disclosure: private or unsecured issuers may not provide the same level of public information as listed companies.

Investing considerations

• Match note maturity and credit quality to your investment horizon and risk tolerance.
• Evaluate issuer creditworthiness, collateral (if any), and priority in the capital structure.
• For convertible and structured notes, understand trigger events, conversion mechanics, fees, and underlying exposures.
• Consider tax status (especially for municipal notes) and how interest payments fit into your overall portfolio.

Key takeaways

• Notes are debt instruments that promise repayment of principal and interest and generally have shorter maturities than many bonds.
• Types range from low-risk Treasury notes and tax-advantaged municipal notes to higher-yield unsecured and structured notes.
• Investors should weigh yield, credit risk, liquidity, tax treatment, and complexity before investing.

Bottom line

Notes are versatile debt securities used across government, corporate, and private finance. They can provide steady income and tailored risk/return profiles, but their safety and suitability depend on the issuer, structure, and investor goals. Assess the terms and risks carefully to make informed decisions.