U.S. Treasury securities are the federal government’s negotiable debt obligations. The major categories are savings bonds, Treasury bills (T-Bills), and Treasury bonds and notes. These debt instruments are backed by the full faith and credit of the government and are considered to be risk free.
There are three types of U.S. savings bonds currently sold: The EE, HH, and I series. The familiar EE (and old E) bond is an appreciation-type security. This means you buy it at a 50 percent discount from its face amount (pay $50 for $100 bond), and the gradual increase in the value of the bond, from your purchase price to its face amount, (redemption price), represents your interest.
The less familiar Series HH (and H) bond is a current-income security. This means you buy it at face value (only by exchanging Series E or EE orU.S.savings notes), and you receive interest in the form of semiannual checks from the U.S. Treasury. Both types of bonds are non-marketable. For example, only the Treasury or an authorized paying agent can redeem them. And the I series is indexed for inflation.
In regards toU.S.savings bonds, the appreciation is computed so that a bond cashed in before maturity loses a good bit of the interest that would have accrued with a constant rate. EE bonds yield a low percentage the first year; thereafter the rate rises periodically up to a set minimum rate. After you have held a savings bond for five years, the government will pay a guaranteed minimum interest rate or a Treasury market based yield, whichever is higher.
This increasing-interest feature is to encourage holding the bond to maturity, but tends to lock in the investment. In any case, the interest rate paid on savings bonds is normally low compared to many alternatives. I would also like to point out that one modest advantage of Series I, EE, and HH savings bonds is that they are exempt from state and local income and personal property taxes. Payments of federal income tax on Series EE bonds may be deferred until the bonds are cashed, disposed of, or reach maturity, whichever comes first.
U.S. Treasury bills, the most marketable fixed-income securities in the world, are issued on a discount (sold at less than face value) basis with maturities of three, six, and twelve months. They are redeemed at face value (a minimum of $1,000) at the specified maturity dates. The difference between the lower issue price and the higher maturity price represents your interest. Or if you sell them in the open market before maturity, your income is the difference between the issue price and your sale price.
When interest rates are on the rise, direct investments in Treasury bills are most lucrative than purchases of the popular money-market certificates offered by banks. For example, if the rate of the six-month money market certificates is 1/4 percent higher than the average rate on Treasury bills of similar maturity, the government securities actually offer a higher yield. That is because the interest to be earned on Treasury bills is deducted in advance from the purchase price, while being paid on the full face value. And, of course, interest from a T-bill is exempt from state and local income taxes, unlike the interest on certificates.
Treasury bonds and notes are also interest-bearing, but usually pay semiannually. maturities for bonds range from 10 to 30 years, while Treasury notes have shorter maturity dates, usually from 2 – 10 years. The Treasury offers bonds and notes in denominations as low as $1,000. Except for a few issues of long-term bonds, the federal government cannot force redemption when interest rates move down.
It is easy to invest in short-term, high-yield government securities. U.S. Treasury bills, notes, and bonds are higher-yield money-market securities representing financial obligations of the federal government. They have different maturities; three months to a year on T-bills, 2 to 10 years on T-notes, and 10 to 30 years on T-bonds. They are also sold or auctioned several times a year. T-bills are sold at a discount with maturity values from $1,000 to $1 million, putting them out of reach for most people. T-notes have a minimum face amount of $5,000, and T-bonds start at a face value of $1,000.
If you purchase Treasury securities from a broker or financial institution, you pay a sales fee. But it is just as easy to purchase them directly from a Federal Reserve office or branch with no fee. The Federal Reserve Bank system has 12 regional offices:Atlanta,Boston,Chicago,Cleveland,Dallas,Kansas City,Minneapolis,New York,Philadelphia,Richmond,San Francisco, and St. Louis. Also, there are 29 state branches. Call any branch and request the “Federal Note Announcement,” which gives notice of when Treasury securities will be auctioned.
You can purchase or subscribe in person or go online at Treasury Direct. This is a great way to start fresh into investing, specifically the much heralded money-market for $1,000, and at the same time avoid unnecessary fees. Saving commissions on a single $1,000 T-bond makes a small dollar difference, but when you start buying Treasury securities in $5,000 or $10,000 amounts, knowing how to energize your purchases will pay off significantly.