Bond Basics: Treasuries
Bonds help add diversity to your portfolio and control risk. But they can be complicated. We can help you understand the basics and make bonds work for you.
See Also: The Basics of Investing in Bonds
Securities issued by the U.S. government and its agencies are the choice of many conservative investors because they can't be matched for safety. However, yields on government issues usually run a little lower than on high-grade corporate issues because they are safer. Here's a rundown of the most popular government debt instruments.
Best for Short-Timers: Treasury Bills
T-bills usually mature in one year or less, and new ones are sold weekly. Minimum purchase is $1,000. When first issued, T-bills are auctioned off to the public on a discount basis, and then redeemed at maturity for the full face amount. If the auction determines that the rate is 5%, for instance, a buyer would pay $9,500 for a $10,000 bill, then collect $10,000 when it matures.
In addition to their safety, T-bills, along with other Treasury securities, are exempt from state and local income taxes. They are issued in book-entry form, meaning you don't actually receive any certificates, just a notification that you own them. You can buy them at www.treasurydirect.gov.
Beat Inflation: Treasury Notes
Notes run for two to ten years. You can purchase them directly through a Federal Reserve Bank or branch, or you can have a broker or a commercial bank do it for you. Interest is paid semiannually, the notes are not callable prior to maturity, and the minimum purchase is $1,000.
In 1997, the government started selling Treasury inflation-protected securities, or TIPS for short. These are five- or ten-year notes whose interest is determined by the inflation rate, with the principal adjusted every six months to reflect the change. This can result in less current interest than a standard T-note, but a bigger payoff at maturity. You are guaranteed to stay on top of inflation.
T-bonds generally carry maturity dates more than ten years after issue. Maturities used to be as long as 30 years, but the Treasury department stopped offering 30-year bonds in 2001. Most cannot be called early by the Treasury. Minimum purchase is $1,000.