Treasury bonds, also commonly known as T-Bonds, are a form of government backed investment. They were first introduced in the United States during World War I to alleviate the abruptly high public debt and have been a favored form of investment ever since.
How T-Bonds Work
Investors of treasury bonds basically purchase a portion of government debt for which they will be compensated via a semi-annual interest rate. Any given individual or corporation may purchase treasury bonds, which are available through banks, post offices, a brokerage, bond dealers or straight from the government via the Treasury website. Bonds are now granted electronically, though they were once done so through paper bills. Investors must choose before buying whether they are interested in a competitive or non-competitive bond. In purchasing a non-competitive bond, an investor must accept whatever given interest rate is offered at the time.
During a single auction, an investor may purchase the maximum of $5 million through noncompetitive bidding. In purchasing competitive bonds, investors must declare their desired return at a government auction. If the rate of interest sought is less then or equivalent to the auction's treasury bond index, then the bid is accepted. This form of bidding is done by corporations and other financially sophisticated entities. Every bond has a face value, commonly called "par value," but are actually sold for less. As an example, you may buy a $5,000 dollar bond for $4,800. All bonds have a particular maturity date, which is when you are entitled to receive the earnings on your investment. Thus, in the example given, you would receive $5,000 -- a profit of $200. The difference in the sum of your investment and your return is called treasury bond rates. When buying the bond, investors have the option of maturity date, which can range from one month to several years. The greater the maturity date, the greater the return on the investment.
Why Invest in T-Bonds
There are various aspects of treasury bonds to consider for a potential investor. Like in all investments, there are upsides and downsides. The most obvious positive feature of treasury bonds is the security. Treasury bonds are insured by what is termed "full faith and credit" by the United States government. The United States government has never defaulted on a loan. This ostensibly makes treasury bonds free of risk. It is theoretically possible that congress may at some point be forced to halt interest payments on bonds but financial experts agree this is highly improbable. They are also extremely affordable.
Beginning in 1998, bonds were obtainable only with a minimum investment of $1,000. This was changed in April of 2008. There are no definite treasury bond prices and can thus be purchased by any individual. A person can make an investment for as little as $100, making it the most accessible form of investment there is. In addition, treasury bonds are exempt from from state taxes. Although treasury bonds have a fixed maturity date, an investor looking for an earlier return can always sell the bond on the secondary market. Of course, with lower risk comes lower reward. Due to the security that comes with the purchase of treasury bonds, there is lesser earning potential then with other forms of investment. Federal taxes are another drawback. With the inauspicious state of national debt, it can be safely assumed that treasury bonds will continue to be available in the foreseeable future.
