U.S. Treasury bonds are bonds that the United States government issues so that it is capable of paying for Federal government projects. When a person or business purchases a Treasury bond, they are actually loaning the Federal government money. Like with all loans, the principal is paid back along with a set rate of interest.
Treasury bonds carry the full faith and credit guarantee of the United States government. This translates to them having very low risk, as the government is always able to print extra money to repay the loan. Another benefit to U.S. Treasury bonds lies in their being tax exempt from local and state taxes. You would still have to pay Federal taxes on all money that you make in interest.
The primary market is where the government markets its Treasury bonds through auctions. You might also buy them on the secondary market using a broker. While the government does not charge fees for partaking in their auctions, brokers likely will expect to receive fees for selling you a U.S. Treasury bond. The Treasury bonds are marketable securities since you are able to sell or buy them once you have obtained them initially. They are considered to be extremely liquid too, since the secondary market for them is very active. The prices for Treasury bonds both at auction and via the secondary market are set by their interest rates. Today’s Treasury bonds can not be called back by the government before maturity, which means that you continue to receive interest until they mature.
Treasury bonds are not without their downsides. Should interest rates rise while you have a Treasury bond, then your money will be making lower interest than it might in another investment. If the interest rates were to increase, then the bond’s resale price would also go down. Inflation that goes up also cuts into the Treasury bonds’ interest that they pay. With practically no risk of the U.S. government defaulting on these bonds, Treasury bonds pay a low return on investment, so higher inflation rates will wipe out all or most of the interest profits as they lower the real worth of the principal and interest repayments.
If you are interested in becoming involved in government auctions to buy the Treasury bonds straight from the Federal Reserve Bank, then you can do so. Simply open a Treasury Direct Account. The government does not charge fees for such an account until it has in excess of $100,000. For these larger accounts, they collect tiny maintenance fees.
Besides Treasury bonds, the government also sells two other kinds of securities. These are Treasury bills and Treasury notes. Treasury bonds are distinguished from these other two types by their length of time till maturity. Treasury bonds do not mature until from twenty years to thirty years elapse. They do make coupon payments of principal and interest in every six month period, like with Treasury notes. Thirty years maturities prove to be more common than do the twenty year maturities with these Treasury bonds.