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Did you know that when you buy a U.S. Treasury bond, you are basically extending the U.S. government a loan? The government borrows a dollar amount from you (usually a minimum of $5,000 and going up in increments of $1,000 from there) and promises to regularly pay you interest. At the end of the loan term, it gives back the original amount you loaned it. And even though the U.S. government credit rating was reduced back in 2011, it's still rated AA+ by Standard and Poor's – which is considered "excellent."
You may be familiar with the three main types of U.S. government treasuries: bills, notes and bonds. The difference between them is simply the length of the loan you're giving to the government. U.S. Treasury notes are issued in maturities ranging from one year to 10 years, while U.S. Treasury bonds' maturities range anywhere from 10 to 30 years. Both pay interest twice a year.
Treasury bills (more known commonly as "T-bills") are very short-term, typically maturing in four, 13 or 26 weeks. Unlike notes or bonds that pay regular interest payments, when you buy a T-bill, you generally buy it at a discount. Then, when the bill matures, you receive its face value. For example, let's say you pay $9,700 for a 13-week T-bill. The government is basically writing you an IOU for $10,000 and agreeing to pay it back to you in three months.
T-bills are backed by the full faith and credit of the U.S. government. In fact, sometimes the current rate the T-bill is paying is called the "risk-free rate." That rate is often used as a basis of comparison for other types of bonds and interest rates. This relationship is called a benchmark.
The interest on U.S. bills, notes and bonds is federally taxable, but is exempt from state and local taxes.
We know you can buy Treasuries at any bank, but at Edward Jones you won't just be sent on your merry way with a deposit receipt and a bond certificate. We'll work with you to see how and when U.S. Treasury bonds, notes and bills make sense as you progress toward your financial goals. And because T-bills are short-term, you should revisit your strategy every year because they will probably need to be replaced when they mature.
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Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.
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