Final answer:
Option 2. is correct. A debt security with a maturity of five years or less is known as a note. Treasury notes have maturities between 2 to 10 years, while treasury bills have even shorter terms. Bonds are broader debt securities with obligations to pay interest and principal by the maturity date.
Step-by-step explanation:
A debt security with a maturity of five years or less is typically referred to as a note. Treasury notes, or T-notes, have maturity dates ranging from 2 to 10 years and are one of the financial instruments used by the federal government to borrow money. In contrast, Treasury bonds, or T-bonds, have longer maturity periods of more than 10 years, up to 30 years. Conversely, Treasury bills (T-bills) are short-term loans with maturities of 13, 26, or 52 weeks.
Bonds, as a broader category, also represent debt securities. The issuer of a bond owes the holder a debt and is obligated to pay interest, known as the coupon, and repay the principal at a later date, called the maturity date. The bond's coupon rate can be paid semi-annually, or at different times throughout the year. When determining the value of a bond, factors like the bond's face value, interest rate, maturity date, and market interest rates are taken into account to compute its present value.