Treasury bonds, often referred to as T-bonds, are typically considered the safest type of bonds because they’re issued by the U.S. federal government and other governments around the world.
While a big government is far less likely to crash and burn before your maturity date than a corporation or other entity, there are circumstances that bring some risk into this market.For instance, all bonds issued by a country are affected when that country receives a change in credit rating.
• Interest rates are fixed, so you never have to guess what profits you will earn from your investment. Everything is open in the terms of the agreement at the time you buy the bond.
• Investments are long term with maturity dates more than 10 years out from the date of investment. If you sell your bond before that maturity date, you risk coming up with a loss.
• Interest payments are released semi-annually.
• Interest payments are exempt from state and local taxes, but you must still include them when paying federal taxes.
• Each bond is worth a minimum of $1,000.
These terms are appreciated by investors interested in playing it safe because everything is fixed. You know what interest rate is used to determine your profits when you will receive your interest payments, and the exact date of maturity for the bond. Since each bond is held for at least 10 years, you can consider this a side income or use the interest payments to fund other investments.
Are you ready for the catch? There are some treasury bonds that don’t stick to the characteristics listed above. For instance, Series I Bonds have two interest rates. One is fixed for the life of the bond, but the other adjusts according to current inflation rates. Series EE bonds allow you to buy them for half the price of their face value, but maturity dates are 30 years in the future. Treasury Inflation-Protected Securities, also known as TIPS, can have maturity dates in 5, 10 or 30 years.
You can buy these bonds from your local bank, but the easiest and most direct route is to open an account with Treasury Direct. This is a website maintained by the federal government for the purpose of selling treasury bonds and securities online. This site will give you detailed information regarding all bonds available today, including calculators to help you determine how much you may profit from different investment bonds.
If you decide to cash in your treasury bond before its maturity date, take it to a financial institution with proof of identification. You can cash out $1,000 in bonds before the institution will require proof of identity beyond your driver’s license. This is inconvenient, but it’s designed to prevent theft of the bonds. Some types of treasury bonds, such as TIPS, require you to fill out a form and formally sell your bond rather than simply cashing it in at a bank.
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