Treasury Bonds, Bills and Notes

One way you can invest is by lending the U.S. government your money. You do this by buying U.S. Treasury bonds, bills or notes.

The following list contains a description of the U.S. treasuries available:

• Treasury bonds. Treasury bonds are sold by the U.S. government at auction and pay a set interest rate every six months until they mature. They are issued in terms of 30 years. Treasury bonds are available in $100 increments, and the minimum amount they are issued for is $100.
• Treasury bills. Treasury bills (T-bills) are sold by the U.S. government at auction and don't have a set interest rate. Investors generally purchase these bills for less than face value and when the holding period is over, an investor receives the full face value of the T-bill. T-bills are available in multiples of $100, with a minimum purchase amount of $100. The holding periods of Treasury bills are short-term and range from a few days up to one year.
• Treasury notes. Treasury notes are sold by the U.S. government at auction and earn a set interest rate every six months until maturity. Notes are issued in terms ranging from two to ten years. The minimum amount they are issued for is $100, with investment increments of $100. These notes are sold at below, equal to, as well as above face value.

TIPS. Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With a rise in the index (inflation), the principal increases and with a drop in the index (deflation) the principal decreases. At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This feature offers protection against deflation. TIPS pay interest every six months and are issued with maturities of five, ten, and 30 years.

Bills, bonds, notes, and TIPS may be purchased directly from the government online at TreasuryDirect, or you can buy them from a bank or brokerage.

Another form of treasuries, U.S. savings bonds, are similar to zero coupon bonds in that the interest on these bonds is paid when the bond matures and the bond is turned in (redeemed).

What's the biggest advantage of investing in treasuries? That's easy--there's practically no risk involved. Their safety lies in the fact that they're obligations of the federal government. The chance that the federal government will renege on you is pretty close to nil. In other words, in the world of securities investing, of the various forms of bonds available, U.S. treasuries are as close to a sure thing as you'll ever get.

Did You Know? A recent examination of Alan Greenspan's (the past chairman of the Federal Reserve) portfolio revealed that a big chunk of his investments are held in U.S. treasuries.

Another advantage that treasuries have is that the interest you receive is not taxed at the state or local level. This may help to offset the disadvantage of treasuries, namely that the interest rates that they pay are on the lower end of the scale. However, a low interest rate is to be expected with such a low-risk security.