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US Treasury Bonds: How They Work

by Ryan Guina

In the world of investments, many investors are looking for safe vehicles where their money will be safe until retirement age. There are several types of bonds available to use in your retirement savings portfolio but one in particular is considered to be the safest of all investments. The US Treasury Bond is considered one of the lowest risk investments you can make. The bonds are offered by the US government and investors, and while there is some risk involved, most people consider US Treasury Bonds to be essentially guaranteed investments.

How US Treasury Bonds Work

US Treasury BondsA bond is essentially a loan where an agreement is made between the lender and the borrower that states the borrower will pay interest on the principal amount and then return the total amount at a set time. The rate of interest on a bond is referred to as a ‘coupon rate’ and the date when the money is to be paid out is known as the ‘maturity’ dates.

A US Treasury bond is a special breed of bond issued by the United States government. The money is used to raise money for governmental initiatives. When you purchase a Treasury bond, you are loaning money to the US government.

Since the government bonds are considered so safe, they often have a lower yield than other types of bonds. The benefit of such a bond besides the lower risk is the fact that interest payments on the bonds are exempt from state and local taxes. Individuals still have to pay Federal income tax, however.

The Treasury bonds must reach their date of maturity before they can be redeemed. They are typically issued with thirty-year maturity dates and pay interest twice a year.

Where Can You Buy US Treasury Bonds?

US Treasury bonds are issued in several denominations which range from $100 to $1 million. The bonds are sold through an auction by the government and can be purchased through the auction at Treasury Direct or through a professional broker.  In the event the auction bidding is particularly competitive, the maximum amount of the bond that can be purchased is $5 million. Bidders do not have control over the bond pricing. It is pre-set and must be accepted as it stands.

Buying and selling US Treasury Bonds on the secondary market. After an auction, a bond can be resold on a secondary market for a price higher than paid for at auction which is referred to as ‘selling at a premium’. If the bond is sold at a lower price, it is referred to as ‘selling at a discount’. Treasury bonds have two values; the face value is the original buying priced used to calculate the coupon interest rate and the price value which is the price the bond was sold at in the secondary bond market.

Buyers can hang on to their Treasury bonds and collect the interest until it reaches its maturity date. For more aggressive investors, you may be interested in trading on the bond market. Either way, a US Treasury bond is one of the least risky investment vehicles an investor can purchase, which is particularly important during times of recession when other investment values are declining in value.


Published or updated December 12, 2012.
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{ 6 comments… read them below or add one }

1 The College Investor

Good article on what a Treasury Bond is. One of the most common questions I receive is why do bond fund prices rise and fall when you get your full amount at maturity.

It is important to consider current interest rates versus those on the bond you buy. Right now, interest rates are very low, which means bond prices are high. As interest rates rise (which they will sometime), the price of the bonds you currently own will fall, and you will see a loss to your bond fund.

A way to avoid this is to diversify with bonds of different lengths to capitalize on changing interest rates.

Hope this helps!

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2 Jon Dough

The FED announced their plans to buy more Treasury Bonds and raise prices (create inflation)… Seeing that the FED prints our currency and loans it to the U.S. government, how could this help our economy? and would it not drive the value of the dollar down even more?

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3 BARBARA VELASCO

I HAVE AN 84 YEAR OLD SISTER WHO HAS A $5,000.00 GOVERNMENT BOND THAT SHE NEEDS TO GET CASHED.
COULD YOU PLEASE ADVISE AS TO WHAT IS THE MOST ECONOMICAL PROCEDURE FOR HER TO GET HER BOND CASHED.
SHE HAS ALL THE NECESSARY PAPERS REQUIRED IN ORDER FOR HER TO GO BEFORE THE COURT BUT WAS ADVISED BY ONE LAWYER THAT SHE WOULD HAVE TO PAY HIM $1500.00 TO GET IT CASHED FOR HER. 30% IS A STEEP FEE.
IS THERE A WAY TO GET HER BOND CASHED WITHOUT HAVING TO PAY SO MUCH?
PLEASE HELP HER?
THANK YOU,
BARBARA VELASCO

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4 Ryan

Barbara, I’m not sure which kind of bond you are referring to, but it doesn’t sound like it is a US Treasury Bond or Savings Bond. You should be able to cash in those types of bonds at a bank or electronically. If it is a bond from a court, then I have no idea what is required. But it is worth shopping around to different lawyers if you need a lawyer’s assistance. I would just open the phone book and start calling local lawyers and asking about their fees. Best of luck.

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5 nate

how many T-Bonds can u open up yearly and will my intrest rate be taxes after cashing out?
is it better to have one big t-bond for long term years?, or many t-bonds for a 6 month period?

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6 June

My husband and I have several series EE bonds, half of then in his name with me as co-owner and the other half in my name with him as co-owner. We would like to change them to our children. We would like to put half of them in our sons name with one of us as co-owner and the other half in our daughters name with one of us as co-owner. Do you know if this can be done without them being considered as a gift and wouldn’t the taxes be claimed by the one that cashed the bonds ? This is all so confusing.

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