Treasury Bonds, Treasury Bond
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Treasury bonds, also called T-bonds, are fixed-interest debt instruments issued by the US Department of the Treasury in order to generate cash for completing government projects. These bonds are marketable securities with a maturity period ranging from 10 to 30 years. A treasury bond yields interest payments on a half-yearly basis. These interest earnings are subject to federal tax regulations.
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How do Treasury Bonds Work?
Treasury bonds are available in increments of $100. An investor can acquire these bonds through competitive or non-competitive bidding when the government auctions them. An investor can buy bonds for a maximum value of either $5 million (through non-competitive bidding) or 35% of the initial offering amount (through competitive bidding). While investors can place the non-competitive bids with the help of a bank, broker, dealer or the TreasuryDirect site, they can not use the services of the site for competitive bids. The TreasuryDirect site is regulated under the US Department of the Treasury’s Bureau of the Public Debt. While buying directly from the government involves no fees, buying from the secondary market involves paying the spread (the difference between the bid and the offer price) to brokers.
The price of these bonds and the interest rates on them are determined at the time of the auction. So, the price of a bond can be more than, equal to or less than the par value, depending on the demand. After acquiring the treasury bonds, the bondholder can either hold them till maturity or sell them in the secondary market.
Benefits of Treasury Bonds
The key benefits of treasury bonds are:
- The secondary market for treasury bonds is highly liquid.
- An investor can earn substantial profits by selling his/her bonds before maturity.
- Treasury bonds have low spreads. This minimizes transaction costs and improves the profitability of the investment.
- The pricing of treasury bonds is very transparent.
- The interest earned on these bonds is exempt from state or local tax laws.
- They are considered as among the world’s safest investment vehicles.
Dangers of Treasury Bonds
The dangers associated with treasury bonds are:
- The resultant yield of treasury bonds is lower than other financial instruments.
- There is the possibility of a default in case the US senate refuses to issue new debts to finance the repayment of the debts that are nearing maturity.
- If interest rates rise during the term of a bond, the investment could yield lower returns than that earned from alternate sources. This can also have a negative impact on the bond’s resale value.
- US treasury bonds cannot be called, which means that they cannot be redeemed by the issuer before maturity.