Considering the rising desire for people all over the world to have their social status ameliorated, it is important to stress here that it is not a nightmare but a possibility to attain for those who are willing to follow basic principles. This is true because the past centuries did not have a huge percentage of people turning millionaires and billionaires compared to the current Twenty First Century. It is apparent that in this information age whereby the whole world has become a global planetary village, those who understand the laws of positive thinking and attraction are making a whole lot of differences regardless the middle and poor families where they are born. Among the several areas where people can understand, focus and concentrate on, we have the area of best treasury bonds. The domain of treasury bonds is quite profitable and has transformed the lives of millions Americans and people of other nationalities across the world who showed interest and invested in it. As such, reflecting on where to invest in for the maximization of profit, then think of the area of treasury bonds.
So many people as a result of the lack of insight on how to go about dealing on treasury bonds, they have reasoned the sector wrongly and have still not realized that those who have invested in the buying and selling of treasury bonds, learn how to go about Treasury bond rates, types of treasury bonds, best treasury bonds, how to buy treasury bonds and how to sell treasury bonds are reaping excess returns from the venture.
What are treasury bonds?
The US government offers Treasury bonds (T-bonds), Treasury notes (T-notes), Treasury Inflation-Protected Securities (TIPS) and Treasury bills (T-bills) which are all American fixed-interest, marketable, and debt security with a maturity of more than 10 years. The treasury bonds are usually issued with a maturity from 10 to 30 years and are thus regarded as long-term securities. Due to their long maturity duration, their prices are said to fluctuate more, however, they also have one of the highest interest rates. T bonds, investors get interest payments every 6 months, and the income obtained is only tax deductible at the federal level. These bonds are backed by the good faith of the US government, thus there are highly secure or risk free, as the American federal government is less likely todefault payment.
Treasury notes: Treasury notes have their maturities between 1 and 10 years. Their price depends on the amount of time to maturity; however, you can buy them from $1000 to $5000. Treasury notes, like Treasury bonds, pay interest every 6 months at a fixed coupon rate.
Treasury Bills: Treasury bills have their maturities in terms of weeks (such as 13 weeks, 26 weeks and 52 weeks). These bills are sold at a discounted price to their face value. This is to say, you can buy a Treasury bill worth $10,000 for just $9,000. At maturity, you will receive the full amount of $10,000 (making them zero-coupon). You can buy these bills during auction sales during which the selling price of is determined by how much the bill is worth on the date of issue. This price depends mainly on interest rates.
CPI-indexed Treasury Notes: These are Treasury inflation protected securities (TIPS) issued by the US Treasury in an attempt to add the varieties of investment opportunities made available by the government to investors. This bond type has a different maturity (such as 5 year, and 10 year) and their interest is calculated on a fixed rate. The main advantage of this type is that the principal increases with the inflation rate, thus, the interest rate is increased over time to payments. However, it has a downside attached to it. The extra amounts on the principal attract high taxes before maturity or before the investor even redeem the bonds. In periods of high inflation, tax payments may even be higher than the extra income earned by the note.
Separate Trading of Registered Interest and Principal of Securities, or STRIPS: This is the type or Treasury security which allows investors to buy, hold and trade the interest and principal components of eligible Treasury notes and bonds as individual securities. You may not be able to buy STRIPS directly from the US Treasury. They are purchased and held through different government securities brokers and dealers and other financial institutions such as the banks. These institutions buy Treasury securities via book-entry receipts, electronically. Once they bought it, they then strip the interest from the principal components to form zero-coupon securities based on units or portions of the interest or principal of the security. Zero-coupon securities are those types of securities that pay interest one time only and only after the securities reach maturity.
Floating Rate Notes (FRN): This is another type of Treasury security introduced by the U.S. Treasury in January 2014. They have a maturity of two years, and are calculated at a variable interest rate every 4 months until maturity. Their interest rates depend on the discount rates in auctions of 13-week Treasury bills.You may buy them at the TreasuryDirect website and through banks and brokers. One advantage of this type is that you can sell it to other investors if you don’t want to wait until its maturity. FRN can be purchased at a minimum price of $100 and a maximum purchase of $5,000,000. Its maturity period is 45 days. The buying price of an FRN may be greater than, less than, or equal to the security's face value.
How Treasury Bonds Works
In order to better understand how treasury bonds works or how investors make their money by investing in treasury bonds, you should look at Treasury bond as a loan the government takes to pay interest on it. At the point of issue, there are conditions that are laid out such as the Treasury bonds rate, and the maturity period. Treasury bonds are used by the US government to raise money for important government projects (e.g. construction a new war plane). Those who purchase these bonds are said to be loaning money to the government. If we consider a real event where the US government need a huge sum of money to construct a special type of war plane (say $1000,000) but it lacks this fund. The government will turn to issue Treasury bonds at a rate, say 5% for a period of 20 years in order to generate this money. Now, consider that an investor buys $10,000 worth of this bond. They will be paying this investor 5% of his $10,000 ($500) every year. If this investor hold on to the maturity date and then come to redeem his investment, he will be paid his face amount (the money he invested) plus the total Treasury bonds interest for the entire 20 year period. Thus he will get:
Total interest = 20 * $500 = $10,000
Total amount to receive = Interest + Face amount
= $10,000 + $10,000
However, the investor will only receive this amount if he holds on till the maturity date. If, peradventure he wants to redeem his bonds before the maturity date, the bond interest will be calculated at a lower Treasury bonds rate (which can be lower than 1%) and he will also be required to pay a fine. Therefore, real advantages come only when you can wait for your bonds to reach maturity.
Benefits of investing in treasury bonds
There are enormous benefits to reap investing in treasury bonds. If you understand the following benefits, you can decide if T-bonds are right for your financial strategy. In addition to the lack of maintenance fees involved, the benefits of treasury bonds include:
Safety: These bonds are backed by the good faith of the US government, which is very less likely to default payment. Thus, T bonds are said to be very safe and secure.
Guaranteed rate of return: With these types of bonds, you are guaranteed a certain rate of return on your investment and you are sure to have it after the maturity period.
No value loss: What marks this sector of investment is thatTreasury bonds are considered extremely safe investments. Since the bonds are backed by the U.S. government, your money will not lose value. If you’re in for the long haul and looking for a guaranteed rate of return with no value loss from an investment, a T-bond might be a perfect product for you.
Tax exemptions: Holders of Treasury bonds are exempted from paying all other types of taxes on this bond except a free at the federal level. Thus, you will not pay municipal or local taxes on the interest you make.
Good for retirement: These types of bonds are generally considered to be a safer method of investment than stocks, you might find them useful if you’re looking to retire. Also, because bonds pay interest every six months, they can help generate a steady stream of income.
Safety: They practically have no risk attached to them. All things being equal, you will definitely get your money back with the promised interest.
Returns are predictable over time: At moments of turbulent times on the stock market, bonds and treasury bonds are known to remain relatively stable.
High-Interest income: Bonds and T-bills pay a higher rate of interest compared to saving accounts in Banks.
Diversifying your investment: Focusing in treasury bonds and treasury bills can be the best way of not putting your eggs in a single basket.
Disadvantages of Treasury Bonds
Inflation Risk: The long maturity period poses a high risk of inflation. If inflation rises during this period, the value of your Treasuries investment may decrease. Put another way; consider a situation where you invest at a Treasury bonds rate of 2%. If the inflation rises by say 3%, you will be at a loss as your investment will not be working in your favor. You will actually receive your investment and interest, but it will be worth less. One way to overcome this limitation is to invest in a Treasury Inflation Protected Securities, or TIPS. This bond type is sold with a maturity of 5 years, 10 years and 30 years.
Interest Rate Risk: Interest risk is mostly felled by those who cannot wait until the maturity date. If you try to redeem your bonds before it’s matured, you may not be able to recover all your investment.
Who can own US Treasury bond?
Qualifying criteria for investing in Treasury bonds were updated in April 2009 and differ depending upon whether you are investing in paper bonds (no longer available) or electronic bonds. Currently, corporations, individuals, private organizations, public organizations, fiduciaries and associations can own physical paper bonds. Corporations, estates, individuals, partnerships, trust funds, and comparable entities can establish Treasury Direct accounts and own electronic savings bonds. There are a handful of additional eligibility requirements for investing in Treasury bonds. You must endeavor to have your social security number and be a:
- Resident of the U.S.
- U.S. citizen living abroad who still possess an American U.S. address information.
- Civilian employee of the U.S. regardless of residence.
- Minor. U.S. Savings bonds, including the Series EE savings bonds, are the lone security teens can own directly.
How to buy treasury bonds
There are three ways through which this can be embarked upon.
The first is called an uncompetitive bid auction. That is for investors who are sure they want the note and are willing to consider any yield. That's the approach of several individual investors use. They can just go online to Treasury Direct to complete their purchase. An individual can only purchase $5 million in Treasury bonds with this method.
The second is a competitive bidding auction. That is for people who are only ready to buy a Treasury if they get the desired yield. They must go through a bank or broker. The investor can purchase as much as 35% of the Treasury Department's initial offering amount with this method.
The third is through the secondary market. That is where treasury owners expose the securities before maturity. The bank or broker plays the role of a middleman. How to buy treasury bonds equally go through these mediums; choosing a broker, the right brokerage firm, evaluating bond prices and also considering new-issue order and confirmation details.
How to sell Treasury bonds
A lot of knowledge is required here not knowing fully that Treasury bonds are not like products sold by business organizations that demand a lot of publicity and marketing in order to get the products sold. Just like how to buy treasury bonds, to selling treasury bonds are equally quite so easy.
Understanding that the US government provides the only unfettered bond-selling avenue open to you as an individual investor. Established in August 1986 by the American Bureau of the Treasury and Public Debt at (www.treasurydirect.gov) is a book-leeway security system that allows you to maintain accounts directly with the U.S. Treasury. This system lets you sell as well as purchase all newly issued Treasury bonds, notes, and bills at auction without paying a commission. Equally available in Treasury Direct are EE and I savings bonds and TIPS. With the growing popularity of the Internet, Treasury bonds have become even more accessible and user-friendly. You can open your Treasury bonds account on-line by filling in an account set on the spot. When your bonds natures, you obviously reinvest your principal if you have given written instructions to do so or sell. Interest flows to the account you designate. When you order bonds online, those buying the bonds will have cash withdrawn from their bank or brokerage account to pay for them while you who sell the bonds will have paid cash into your account.
With the successful implementation of treasury bonds and the advent of day-trading stock buyers, it was widely assumed that selling and buying bonds online would also evolve into a simple matter of a single click. As it turns out, that assumption was false. Individual retail customers don’t have liberal access on how to sell Treasury bonds online as well as how to buy. Without a broker, individuals can sell and buy only new issue treasuries. Being mindful of the fact that Web permits you to check sites and view bond prices and offerings, in most situations you still have to take on a broker to finalize your trade. In a nutshell, getting appropriate websites are the swiftest way through which treasury bonds are sold as well as bought. Through developed websites on treasury bonds, every detail you need to know about how to sell treasury bonds and buy, ranging from treasury bond rates, best treasury bonds, types of treasury bonds, are most important.
Types of treasury bonds
As a result of the lack of default risk as well as far higher level of liquidity, treasuries often provide the lowest yields of bonds with similar maturities and are considered benchmarks of the fixed income asset class. Important to note is the fact that a fixed income asset is one that pays a specific interest income to the investor over a specific period of time.
Series EE Savings bonds investing
From the historic point of view, the saving of bonds has become one of the most renowned investments in the United States for more than a century. Of these, almost none is better considered than the Series EE savings bond. Delivered by the American Treasury to help raise money to fund the government, Series EE savings bonds permit investors to buy bonds in much smaller denominations than traditional corporate or municipal bonds, which most often need $10,000 or $100,000 for each bond.
This category of bonds operates variedly in view of whether you own electronic EE savings bonds or paper Series EE savings bonds. This is illustrated below:
Electronic Series EE Savings bonds
- Electronic Series EE savings bonds are sold at face value. If you decide to invest $50, you will obtain a $50 electronic Series EE savings bond and it is worth full value when eligible for redemption.
- Electronic Series EE savings bonds can be purchased in amounts of $25 plus, "to the penny". If you got $547.32 you decide to invest, you should do that, for doing this is a strategic choice for small investors with limited funds.
- Acquisition of electronic Series EE savings bonds are limited to no more than $25,000 per calendar year.
- Electronic Series EE savings bonds are issued to a designated account. You will obtain no physical paper bond.
When you buy a Series EE savings bond, you are borrowing money to the American federal government. From time to time, the government changes the rules on a savings bond, so how your Series EE bonds function is predicated on when you purchased them. As concerns the treasury department, "Series EE bonds purchased on or after May 1, 2005, earn a fixed rate of profit, enabling you know what the bonds are valued at all times. The purchased of EE bonds between May 1997 as well as April 30, 2005, are resident in 5-year treasury security yields and earn a variable market-based rate of coupon." That is, this has become a fixed Treasury bond rate again since April 30, 2005. All through eight years that follows, the bonds had variable interest rates; meaning that the investor wouldn't know the rate of interest his or her bond would pay because it would change with overall coupon rates. This can be ideal in moment of inflation, terrible in moments of balance economic growth and low-interest rates.
Series EE bonds are a type of empty-coupon bond. Having a traditional bond, you could invest $10,000 and earn a 5% coupon per year.
For every passing year, you collect $500 in interest funds. In the U.S, industries typically carry out payments two times per year, so you'd obtain $250 on June 30th and $250 on December 31st. When the bonds matured, you'd receive the face value of the bond ($10,000). With zero coupon bonds, in contrast, you never obtain cash interest funds. Rather, the bonds are delivered at deep discounts to face value and have been calculated to compound to the point that they are worth the face value of the bond on the maturity date.
I Bonds for new investors
Each time you purchase a Series I bond, you pay the entire face value of the bond itself. In other words, if you obtain a $5,000 face worth, I bond, you will provide $5,000. Likewise, if you invest in a $10,000 face wort I bond, you will need to offer $10,000 in cash at the time you acquire it. According to the United States Treasury, I bonds accelerate in worth on the first day of each month, and interest is compounded semi-annually based upon the issue date of the specific I Bond. This is significant because it implies that your I bond is really a type of zero coupon bond. In the case of traditional corporate bond or municipal bond, you won't obtain checks in the mail for the interest you earned. Rather, the worth of your I bond will obviously increase regularly with your interest being added back to the principal worth. It is when you cash the bond (referred to as "redeeming" the bond), will you obtain your money back plus alongside of the interest you've made over the years.
True to say, I bonds fall in the class of investments in the world that the American Federal Government guarantees. In the event where inflation picks up, you will earn more interest through the inflation adjustment. If the economy becomes deflationary, the I bonds have a certainty that they will never go below 0.00% interest per year, meaning your purchasing power would continue to increase even if you weren't earning any interest on your money.
I bonds are subject to government taxes, but you as an investor have the option to pay taxes on a cash basis or an accrual basis. Under the accrual method, you would pay taxes each year on the income you earned that was added back to the value of your I bond. Several investors prefer the cash approach of taxation so they don't have to pay taxes out of their own pocket each year, instead using the bond proceeds when they sell the bond to cover any obligations to the government. For more information, read Tax Benefits of Series I Savings Bonds.