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What Are Treasury Bonds?

Jim B.
Jim B.

Treasury bonds are fixed income investments opportunities issued by the United States government to investors. Since the bonds are backed by the US Treasury, investors who buy the bonds can be practically assured that the face value of the bond will be returned to them. Investors may purchase Treasury bonds, or T-bonds, with non-competitive bids, which assures them of the purchase price, or with competitive bids, which might allow purchase at lower than face value. T-bonds pay interest to investors at semi-annual intervals, but their value can be damaged by rising interest rates or inflation.

Bonds are often issued by an institution as a way of raising money. When an investor buys a bond, he is actually giving a loan to the issuer, with the expectation of receiving repayment of the face value of the bond as well as regular interest payments. One such institution that issues bonds is the United States government, allowing investors to receive interest payments and return of the principal practically risk-free.

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The US government issues Treasury bonds with terms ranging anywhere from 10 to 30 years. Interest payments are locked in at the time of purchase, which can come either via a competitive or non-competitive bid. Competitive bids, which may or may not result in purchase of the bond, are usually accomplished through bank issues of the bonds. Non-competitive bids assure the investor of purchase of Treasury bonds at a specific price and at a definite interest rate. Purchase prices range from $1,000 US Dollars (USD) to $1 million USD.

Since there is little risk of the US government defaulting on their bond obligations, the interest rates that they offer are relatively low compared to corporate bonds. For that reason, Treasury bonds are often used as the benchmarks when comparing interest rates. Corporate bond spreads are determined by comparing the yield of corporate bonds to the yield of T-bonds.

While Treasury bonds are investments that carry relatively little risk, they may not be competitive when compared with other investments if some prevailing economic conditions exist. Rising interest rates can mean that the money of investors that is tied up in T-bonds could be earning more if placed in other investment vehicles. Excessive inflation can also be problematic for the owners of T-bonds. If inflation rates soar above the interest rates being paid by T-bonds, the money being earned by the bonds might not be enough to keep up with rising prices.

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