Treasury Bonds: The Safest Investment Around

Treasury bonds are debt securities issued by the federal government. To put it another way, when you buy a treasury bond, you buy a portion of the federal debt. The federal government can then use your money to pay off it's expenses. After a certain period of time, the federal government repays you whatever you paid to buy it. Until then, you will receive interest payments, which will add to your income. Treasury bonds are more secure that other bonds, which makes them some of the safest investments available.

Understanding Treasury Bonds

When the federal government runs short on money, there are a number of things it can do. It can raise taxes. It can borrow money from some other country. Since the first option is politically unpopular and the second option isn't always practical, the government has come to increasingly rely on treasury bonds. The treasury bonds are sold under assumption that the funds it generates will help the country's economy, which, in turn, will allow the federal government to generate enough funds to pay back all the federal bonds and still have plenty left over for other expenses.

That said, even if the federal government does not generate the extra money, it is still obligated to repay you. The only way it can avoid this obligation is if it suffers complete and utter collapse. This means that, unless there is some major catastrophe, you can rest safely knowing that you will get your money back. Bonds issued by private companies, on the other hand, hinge entirely on the companies' finances. If the company suffers the financial shortfall and goes bankrupt, the bonds become worthless. Because of this, treasury bonds are far more secure and, thus, far safer than any other bonds issued anywhere in United States. Even smaller government entities such as cities and states aren't as secure. Thanks to their security, treasury bonds have been especially popular during the hard time, and every savvy investor includes them in his or her portfolio.

How Treasury Bonds Work

Treasury bonds are issued every year. They are sold at open auctions. You can bid either competitively or non-competitively. If you are bidding non-competitively, you will automatically receive the treasury bonds you bid on at the rate you requested. However, the bids are capped at $5 million dollars. On the other hand, if you bid competitively, you will only get the bond if you place the highest bids, but you will benefit from the less restrictive caps, which are set at 35% of the total offerings.

The bond's period of maturity, the time between the date purchase and the date of repayment, varies depending on the economic condition. For example, when United States enjoyed a surplus, the maturation period was usually ten years, but when the economy fell into the recession and deficits skyrocketed, the 30-year treasury bonds became much more common. Once you purchase a bond, you will receive interest payments once every six months. Those interest payments aren't subject to state and local taxes, but they will be taxed as income on federal level.

Treasury Bonds and Secondary Markets

If you don't want to wait for a treasury bond to reach maturity, you can always sell the treasury bond to another investor. This is known as selling treasury bonds at a secondary market. Your interest payments will transfer to the buyer, and the buyer will get the final repayment.