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How U.S. Treasury Bonds Work

For the ultimate safety with your bond investments, you can turn to the U.S. government, the most reliable borrower in the world. The U.S. government has never defaulted on a loan, and it would take a mighty big catastrophe before the U.S. Treasury could collapse. To put it simply, you'll never have to worry about the U.S. not paying you back if you buy some of its bonds.

Since U.S. government bonds are among the safest in world, they almost always have lower yields than other bonds of the same maturity. That's the price you pay for quality. And they do have some risks. For instance, you can't predict what price you'll be able to get for your bonds if you need to sell at some point before maturity.

Another advantage of Treasuries is that interest payments are exempt from local and state taxes (however, not from Federal income taxes).

Treasury securities cannot be redeemed before maturity and do not have call provisions. Some Treasury bonds issued before 1985 did have call provisions, however, so you need to watch out if you buy these bonds in the secondary market. As soon as the bonds are called, interest payments cease.

You can buy Treasuries through a broker, or you can buy them directly from the federal government, which holds regular auctions that individual investors can participate in. However, if you buy directly from the government, you can't redeem the security prior to maturity. You'd have to use the services of a broker to sell your bond in the secondary markets.


Treasury Bonds, Bills and Notes

The United States government issues several different kinds of bonds through the Bureau of the Public Debt, an agency U.S. Department of the Treasury. Treasury debt securities are classified according to their maturities:

Treasury Bills have maturities of one year or less.
Treasury Notes have maturities of two to ten years.
Treasury Bonds have maturities greater than ten years.
Treasury Bonds, Bills, and Notes are all issued in face values of $1,000, though there are different purchase minimums for each type of security.

Investors often shorten the word Treasury to just the letter "T" when referring to these bonds. Thus, Treasury Bonds are known as TBonds, Treasury Notes are called TNotes, and Treasury Bills are TBills.

Treasury Bills are issued in three maturities. Bills with 91-day and 182-day maturities are auctioned by the Treasury each Monday. 364-day Bills are auctioned every four weeks on Thursday, 13 times a year. The interest rate of TBills is determined at each auction, depending on what bidders are willing to pay. TBills do not make interest payments, however. Instead, they are purchased at a discount to face value. They are the only Treasury securities that sell at a discount.

U.S. Treasury Notes are issued in two-, three-, five-, and ten-year maturities. The two year and five year Notes are auctioned each month, while the three year Notes are issued quarterly, and ten year Notes are auctioned six times a year. All Notes pay interest twice a year, and expire at par value.

Treasury Bonds, TBonds, are usually issued in thirty-year maturities, and pay interest twice a year.

No matter what you're buying, you can often get a better deal when you buy direct. And the U.S. Treasury has a special program for individual investors to help cut out the middleman (in this case, your broker) and help you to purchase TBonds, Bills, and Notes.

The program is called Treasury Direct, and it allows you to set up an account to make purchases of Treasury securities at auction, along with all the big guns. The main attraction of Treasury Direct is that there are no brokerage fees or other transaction charges when you buy through the program. (There is a $25 per account annual maintenance fee, but only if your account is greater than $100,000.)

To set up a Treasury Direct account, you'll need to fill out an application form that you can download from the program's web site. The minimum investments in Treasury Direct are $10,000 for bills; $5,000 for notes maturing in less than five years; and $1,000 for securities that mature in five or more years. Interest is then paid into your Treasury Direct account, as is a security's par value when it matures.

Another advantage of Treasury Direct is that you can access your account on the Web to check account balances or reinvest a security when it matures.




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MARILYN-Michael Ventresca, Artist, Monroe Art
Mike Ventresca
Signed by the Artist and Numbered-Limited (60 only) Lithographic Edition, 1986

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