Low Risk Investments Cont.: Treasury Bonds, Treasury Notes, Treasury Bills

Treasury bonds, notes, and bills are among the safest investments in that they are fully backed by the U.S. government. The downside to these investments is they will usually give you an unexciting return on your investment.

Treasury Bond - When you buy a bond, you are loaning the government money. Treasury bonds (T-bonds) can be purchased for a minimum investment of $1000 or a maximum of $5 million for non-competitive purchases or 35% of the offering. They pay interest semi-annually and are not taxed at the state or local level, but are taxed by the Feds and they mature in more than 10 years. Once purchased, bonds can be sold in the secondary market (stock exchange). You can find out more information than you probably want to know by going to the Treasury Direct web site. You can purchase T-bonds directly from the government, a bank, or your trusty broker.

In addition to the T-bond, you can also purchase EE and I savings bonds. The major difference between these securities is how interest is paid. Both pay interest twice a year and both have a 3 month interest penalty for early withdrawal, but EE bonds pay a fixed rate of interest while I bonds are designed to hedge inflation by guaranteeing a rate slightly above the rate of inflation. There’s a lot more to these than I choose to cover here because you can get all that information easily from Treasury Direct.

Treasury Note - These are shorter-term (one to 10 years) loans to the government. Interest is paid every six months and is only taxed by the Feds. These notes are auctioned a various number of times during the year depending on the term of the note. You can get this information and more by going to Treasury Direct.

Treasury Bills - Treasury bills are short-term government loans ranging from four - 26 weeks. The interest you are paid on these is determined by the discounted price you pay and the face value of the bill. For instance, just for giggles, let’s say you buy a T-bill for $990 that has a face value of $1000. The difference between the face value and the price you pay is $10 ($1000 - $990= $10). Let’s also say you’ve purchased a four-week T-bill. At the end of the four weeks, you cash in and receive $1000 (the face value). The $10 represents your profit, which is 1% for the 12 weeks or about ¼% a month. If you annualize that (calculate the rate in terms of earnings per year), that would be a nominal rate of 3% (1/4% a month times 12 months). T-bills can be purchased directly from the government, from a broker, or a bank. The Feds auction them every week.

If you are so inclined, you too can participate in the auction of these securities, but to do so, you will need to go through a bank or broker. Only non-competitive bids (purchase at the asking price) can be purchased directly from the government. Keep in mind that there are fees when you insert a middle agent into the transaction. Why? Because banks and brokers are businesses and the first law of business is profit.

The information I provide for you is a primer designed only to launch you in the right investment direction. Laws change, securities change in the way they are offered. I strongly encourage you to invest a little time each day or week in your own research. However, if you have any questions, I will be happy to answer them or direct you to where you can get the answers.