What is a Treasury Bond?

Mary McMahon
Mary McMahon

A treasury bond is a debt instrument issued by the United States Treasury. The treasury raises money which can be used to run the United States Government by selling bonds and other financial securities, and it provides incentives to citizens to purchase such securities to ensure that it will have funds when it needs them. By purchasing a treasury bond, someone is essentially lending money to the government in exchange for fixed interest payments every six months. Once the bond matures, the holder receives its face value.

Treasury bonds can be used as savings, as the face value of the bond will be paid when the bond matures.
Treasury bonds can be used as savings, as the face value of the bond will be paid when the bond matures.

Treasury bonds mature in a minimum of 10 years, with 10 year bonds being most common, although some mature in as much as 30 years. They are sold four times a year: in February, May, August, and October. Auctions of bonds are held by the Treasury, and individuals can also purchase bonds directly through the Treasury. Recipients can buy treasury bonds in a wide variety of denominations, with the maximum allowable purchase being five million dollars worth of bonds, and purchasers will receive interest payments every six months until the bond matures.

Because treasury bonds are backed by the full faith and credit of the United States government, they are a very highly rated security, making them an extremely sound investment. The interest returns tend to be fairly low, and certainly lower than more risky securities, but some people prefer to invest in T-bonds, as they are called, because they are highly dependable.

The interest income from a treasury bond is only taxed on the federal level, not on the state or local level. This can be a distinct benefit for people who are receiving large interest payments, and is another reason some people like to invest in treasury bonds. The tax forgiveness is once of the incentives offered by the Treasury to encourage people to buy T-bonds.

The interest rate on a treasury bond tends to be less than thrilling, which leads many investors to purchase these bonds in large quantities to ensure large interest payments. This can make investment in treasury bonds prohibitive for people without a great deal of money, as they may lack the funds necessary to purchase enough bonds to make the interest payments worthwhile. However, treasury bonds can also be used as a savings instrument, as the face value of the bond will be paid out when it matures, generating a burst of funds which may be useful. Parents, for example, might choose to purchase T-bonds yearly so that their children will have money for college.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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