note

Notes are typically medium-term debt, but not always. For example, Treasury notes (T-notes) are intermediate-term bonds issued by the U.S. Treasury. They mature in two, three, five or 10 years.

You might hear people use the phrase "carry the note," which means to take on debt from another issuer. For example, let's say you plan to purchase a business for $2 million. You have only $200,000 in cash for the seller and want to pay the seller over time for the rest. Essentially, you're borrowing $1.8 million from the seller, and the seller is "carrying a note" until you pay back that $1.8 million.

Town XYZ wants to purchase a new building to replace the old City Hall. The building costs $10 million. Town XYZ expects to pay $5 million cash for the building but needs to raise another $5 million. It expects to receive at least that much next April after the annual income tax filing deadline has passed, but the real estate deal is scheduled to close six months before that date, in October.

Because of the timing, Town XYZ issues $5 million of tax anticipation notes that mature in May. (Note that tax anticipation notes are typically issued at a discount, meaning that the investors will pay, say, 95% of the face value of each bond; the actual discount depends on the market and the issuer’s creditworthiness.) The notes pay buyers 5% interest per year. Remember, however, that the notes will be outstanding for less than one year.

Town XYZ is then able to purchase the building for $10 million in October. When April arrives, Town XYZ has its income tax receipts and uses a portion of them to repay the TANs (which generally get first dibs on tax receipts). TAN maturities are usually not longer than one calendar year.