If you’re trying to navigate the investment waters, it can be a confusing and murky trip. You want to make the most of your money, but it can be scary. You don’t want to lose all of your hard-earned money. Maybe you’re looking for a safe investment, and that’s where these bonds come in.
Let’s take a look at treasury bonds and how they work.
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.
Bonds are one of the safest investments you can make. They are great supplemental investments to include in your portfolio. I get a lot of questions about bonds, particularly Treasury Bonds and how bonds work.
So, How Do US Treasury Bonds Work?
If you’re just starting your investment portfolio, or you’re looking to give it an extra boost, then you should consider bonds.
Before you start making more investments, you’ll need to understand the advantages and disadvantages of bonds and the different types you can purchase.
A 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.
For example, let’s say that you bought a bond for $100 and the bond is worth $150 with a 20-year maturity date. 20 years after that date, you can redeem that bond for at least $150. These bonds are a guaranteed investment.
But, with the low risk comes a low reward.
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.
When you’re looking at bonds, it’s important that you take note of the maturity date on the bonds. Bonds can have a maturity date of anywhere from 10 years to 30 years, but the majority of them are going to be 30 years.
These bonds are an excellent idea for people who are on a fixed-income. They are a safe investment that helps form the yield curve. These government bonds, coupled with other safe investments from the government will ensure that you have the money that you need, regardless of which stage of life you’re in.
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.
The amount that you make on the bonds are going to depend on the face value of the bond, how much you purchase them for, and the interest rate of the bond. Regardless of how much you purchase the bond for, treasury bonds are never going to be a massive investment.
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.
There are several other kinds of bonds that you can choose from. Treasury bonds are going to be the safety, but you can also buy corporate bonds, municipal bonds, savings bonds, and several others. They are great ways to diversify your portfolio without having to put your money in risky stock investments.
Alternatives to Treasury Bonds
Worthy Bonds has taken the ease of the internet and applied it to corporate debt.
Worthy makes secured small business loans that are funded through their platform. All of these loans are secured through liquid assets, so they are some of the safest debt you can purchase.
You make money by investing as little as $10 on their site and receiving a solid 5% return on that money. On top of that, you can withdraw your money at any time. I told you they made it easy.
5% is much better than you can get with savings bonds and the money is not locked in place. Overall Worthy Bonds is a great alternative to the US Savings bond.
High-Yield Savings Accounts
Many people are needlessly forfeiting money by housing their savings with traditional brick-and-mortar banks rather than via online savings accounts.
Online savings accounts are able to offer much higher APY than brick-and-mortar banks because they don’t have nearly the amount of overhead costs as their physical counterparts. So, they pass along those savings (in part) to their customers.
For example, the APY for a savings account at a major national bank may only offer 0.10%. On the other hand, some online banks are currently offering 2.45% APY for their online savings accounts.
For a savings balance of $15,000, a 2.45% APY translates to an additional $372 a year by you doing absolutely nothing! Compare that to $15 interest gained on the same amount for an account earning 0.10% interest. The numbers speak for themselves.
One of our favorite online banks is CIT Bank, which offers some of the highest interest rates in the nation.