US Treasury Bonds: How They Work

If you’re trying to navigate the investment waters, it can be a confusing and murky trip. You want to make the most of your money, but it can be scary. You don’t want to lose all of your hard-earned money. Maybe you’re looking for a safe investment, and that’s where these bonds come in. Let’s…
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If you’re trying to navigate the investment waters, it can be a confusing and murky trip. You want to make the most of your money, but it can be scary. You don’t want to lose all of your hard-earned money. Maybe you’re looking for a safe investment, and that’s where these bonds come in.

Let’s take a look at treasury bonds and how they work.

In the world of investments, many investors are looking for safe vehicles where their money will be safe until retirement age.

There are several types of bonds available to use in your retirement savings portfolio but one, in particular, is considered to be the safest of all investments. The US Treasury Bond is considered one of the lowest risk investments you can make.

The bonds are offered by the US government and investors, and while there is some risk involved, most people consider US Treasury Bonds to be essentially guaranteed investments.

Bonds are one of the safest investments you can make. They are great supplemental investments to include in your portfolio. I get a lot of questions about bonds, particularly Treasury Bonds and how bonds work.

So, How Do US Treasury Bonds Work?

If you’re just starting your investment portfolio, or you’re looking to give it an extra boost, then you should consider bonds.

Before you start making more investments, you’ll need to understand the advantages and disadvantages of bonds and the different types you can purchase.

A bond is essentially a loan where an agreement is made between the lender and the borrower that states the borrower will pay interest on the principal amount and then return the total amount at a set time.

The rate of interest on a bond is referred to as a ‘coupon rate’ and the date when the money is to be paid out is known as the ‘maturity’ dates.

A US Treasury bond is a special breed of bond issued by the United States government. The money is used to raise money for governmental initiatives.

When you purchase a Treasury bond, you are loaning money to the US government.

For example, let’s say that you bought a bond for $100 and the bond is worth $150 with a 20-year maturity date. 20 years after that date, you can redeem that bond for at least $150. These bonds are a guaranteed investment.

But, with the low risk comes a low reward.

Since the government bonds are considered so safe, they often have a lower yield than other types of bonds. The benefit of such a bond besides the lower risk is the fact that interest payments on the bonds are exempt from state and local taxes. Individuals still have to pay Federal income tax, however.

The Treasury bonds must reach their date of maturity before they can be redeemed. They are typically issued with thirty-year maturity dates and pay interest twice a year.

When you’re looking at bonds, it’s important that you take note of the maturity date on the bonds. Bonds can have a maturity date of anywhere from 10 years to 30 years, but the majority of them are going to be 30 years.

These bonds are an excellent idea for people who are on a fixed-income. They are a safe investment that helps form the yield curve. These government bonds, coupled with other safe investments from the government will ensure that you have the money that you need, regardless of which stage of life you’re in.

Where Can You Buy US Treasury Bonds?

US Treasury bonds are issued in several denominations which range from $100 to $1 million.

The bonds are sold through an auction by the government and can be purchased through the auction at Treasury Direct or through a professional broker.

In the event the auction bidding is particularly competitive, the maximum amount of the bond that can be purchased is $5 million. Bidders do not have control over the bond pricing. It is pre-set and must be accepted as it stands.

Buying and selling US Treasury Bonds on the secondary market

After an auction, a bond can be resold on a secondary market for a price higher than paid for at auction which is referred to as ‘selling at a premium’.

If the bond is sold at a lower price, it is referred to as ‘selling at a discount’. Treasury bonds have two values; the face value is the original buying priced used to calculate the coupon interest rate and the price value which is the price the bond was sold at in the secondary bond market.

The amount that you make on the bonds are going to depend on the face value of the bond, how much you purchase them for, and the interest rate of the bond. Regardless of how much you purchase the bond for, treasury bonds are never going to be a massive investment.

Buyers can hang on to their Treasury bonds and collect the interest until it reaches its maturity date.

For more aggressive investors, you may be interested in trading on the bond market.

Either way, a US Treasury bond is one of the least risky investment vehicles an investor can purchase, which is particularly important during times of recession when other investment values are declining in value.

There are several other kinds of bonds that you can choose from. Treasury bonds are going to be the safety, but you can also buy corporate bonds, municipal bonds, savings bonds, and several others. They are great ways to diversify your portfolio without having to put your money in risky stock investments.

Alternatives to Treasury Bonds

Worthy Bonds has taken the ease of the internet and applied it to corporate debt.

Worthy makes secured small business loans that are funded through their platform. All of these loans are secured through liquid assets, so they are some of the safest debt you can purchase.

You make money by investing as little as $10 on their site and receiving a solid 5% return on that money. On top of that, you can withdraw your money at any time. I told you they made it easy.

5% is much better than you can get with savings bonds and the money is not locked in place. Overall Worthy Bonds is a great alternative to the US Savings bond. Earn 5% Interest with Worthy

High-Yield Savings Accounts

Many people are needlessly forfeiting money by housing their savings with traditional brick-and-mortar banks rather than via online savings accounts.

Online savings accounts are able to offer much higher APY than brick-and-mortar banks because they don’t have nearly the amount of overhead costs as their physical counterparts. So, they pass along those savings (in part) to their customers.

For example, the APY for a savings account at a major national bank may only offer 0.10%. On the other hand, some online banks are currently offering 2.45% APY for their online savings accounts.

For a savings balance of $15,000, a 2.45% APY translates to an additional $372 a year by you doing absolutely nothing! Compare that to $15 interest gained on the same amount for an account earning 0.10% interest. The numbers speak for themselves.

One of our favorite online banks is CIT Bank, which offers some of the highest interest rates in the nation.

Visit CIT Bank

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  1. Pauline Robinson says

    My wife and I own I-Bonds together (listed as husband or wife). If neither one of us is alive to cash these I-bonds in, how do we designate a beneficiary?

  2. June says

    My husband and I have several series EE bonds, half of then in his name with me as co-owner and the other half in my name with him as co-owner. We would like to change them to our children. We would like to put half of them in our sons name with one of us as co-owner and the other half in our daughters name with one of us as co-owner. Do you know if this can be done without them being considered as a gift and wouldn’t the taxes be claimed by the one that cashed the bonds ? This is all so confusing.

  3. nate says

    how many T-Bonds can u open up yearly and will my intrest rate be taxes after cashing out?
    is it better to have one big t-bond for long term years?, or many t-bonds for a 6 month period?


    I have an 84 year old sister who has a $5,000.00 government bond that she needs to get cashed. Could you please advise as to what is the most economical procedure for her to get her bond cashed. She has all the necessary papers required in order for her to go before the court but was advised by one lawyer that she would have to pay him $1500.00 to get it cashed for her. 30% is a steep fee. Is there a way to get her bond cashed without having to pay so much? Please help her?

    • Ryan says

      Barbara, I’m not sure which kind of bond you are referring to, but it doesn’t sound like it is a US Treasury Bond or Savings Bond. You should be able to cash in those types of bonds at a bank or electronically. If it is a bond from a court, then I have no idea what is required. But it is worth shopping around to different lawyers if you need a lawyer’s assistance. I would just open the phone book and start calling local lawyers and asking about their fees. Best of luck.

  5. Jon Dough says

    The FED announced their plans to buy more Treasury Bonds and raise prices (create inflation)… Seeing that the FED prints our currency and loans it to the U.S. government, how could this help our economy? and would it not drive the value of the dollar down even more?

  6. The College Investor says

    Good article on what a Treasury Bond is. One of the most common questions I receive is why do bond fund prices rise and fall when you get your full amount at maturity.

    It is important to consider current interest rates versus those on the bond you buy. Right now, interest rates are very low, which means bond prices are high. As interest rates rise (which they will sometime), the price of the bonds you currently own will fall, and you will see a loss to your bond fund.

    A way to avoid this is to diversify with bonds of different lengths to capitalize on changing interest rates.

    Hope this helps!

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