Fixed Income Assets | Bonds | Treasury Bonds

Treasury Bonds

Treasury Bond - DefinitionDefinition of ‘Treasury Bond (T-Bond)’
A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

Treasury bonds are issued with a minimum denomination of $1,000. The bonds are initially sold through auction in which the maximum purchase amount is $5 million if the bid is non-competitive or 35% of the offering if the bid is competitive. A competitive bid states the rate that the bidder is willing to accept; it will be accepted depending on how it compares to the set rate of the bond. A non-competitive bid ensures that the bidder will get the bond but he or she will have to accept the set rate. After the auction, the bonds can be sold in the secondary market.

Investors who wish to participate in auctions and purchase Treasury securities directly from the Federal Reserve Bank can open a Treasury Direct Account. There are no fees associated with the account unless it contains over $100,000, at which point a very small maintenance fee is incurred.

There are three types of securities issued by the U.S. Treasury. These are distinguished by the amount of time from the initial sale of the bond to maturity.

  • Treasury bonds: These securities have the longest maturity of any bond issued by the U.S. Treasury, from 10 to 30 years. The 30-year bond is also called the “long bond.” Denominations range from $1000 to $1 million. T-bonds pay interest every 6 months at a fixed coupon rate. As mentioned above, these bonds are not callable, but some older T-Bonds available on the secondary market are callable within five years of the maturity date.
  • Treasury notesT-notes have maturities between 1 and 10 years. Denominations range from $1000 to $5000 and are determined by the amount of time to maturity. Like T-bonds, these securities pay interest semi-annually at a fixed coupon rate.
  • Treasury BillsT-bills are available with maturities of 13 weeks, 26 weeks and 52 weeks. They are purchased at a discount to their $10,000 face value, and the full amount is received at maturity (making them zero-coupon). The bills are sold at auction where the price of sale is determined by how much the bill is worth on the date of issue, which depends mainly on interest rates.
CPI-indexed Treasury Notes (TIPS – Treasury Inflation-Protected Securities): TIPS are inflation-indexed securities issued by the U.S. Treasury in an effort to widen the selection of government securities available to investors. The notes have a 10 year maturity and pay interest at a fixed rate. The principal increases with the inflation rate, which in turn increases future interest payments. One danger associated with investing in TIPS is that taxes are due on the increased principal before maturity when the investor gains access to the principal. In times of high inflation, tax payments could even exceed the interest income earned by the note.

Bonds Resources
» CNN Money | Bonds and Rates

Comments are closed.