Treasury bonds

Definition

Treasury bonds are long-term debt securities issued by the U.S. Department of the Treasury to finance government spending, with maturities typically ranging from 10 to 30 years. These bonds pay interest every six months and return the principal amount at maturity, making them a reliable investment option for individuals and institutions seeking safety and income.

5 Must Know Facts For Your Next Test

1. Treasury bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
2. The interest earned from Treasury bonds is exempt from state and local taxes, although it is subject to federal income tax.
3. The prices of Treasury bonds can fluctuate based on changes in interest rates; when rates rise, bond prices typically fall and vice versa.
4. Treasury bonds are sold through auctions, where investors can place bids either competitively or non-competitively.
5. Investors can hold Treasury bonds in brokerage accounts or through TreasuryDirect, a platform for purchasing U.S. government securities directly.

Review Questions

• How do Treasury bonds compare to other types of investments in terms of risk and return?
  • Treasury bonds are often viewed as low-risk investments due to their backing by the U.S. government, making them safer compared to stocks or corporate bonds. While they offer lower returns compared to more volatile investments like equities, they provide a stable source of income through regular interest payments. This makes them attractive to conservative investors who prioritize capital preservation over high returns.
• Discuss how changes in interest rates impact the pricing of Treasury bonds and investor behavior.
  • Changes in interest rates have a direct impact on Treasury bond prices. When interest rates increase, new bonds are issued with higher yields, making existing bonds with lower rates less attractive, which causes their prices to drop. Conversely, when rates fall, existing bonds become more valuable as their higher fixed rates stand out. This dynamic influences investor behavior; for example, investors may choose to sell existing bonds during rising rate environments to avoid losses.
• Evaluate the role of Treasury bonds in an investment portfolio and how they can provide financial stability during economic downturns.
  • Treasury bonds play a crucial role in diversifying an investment portfolio by providing stability and low correlation with riskier assets like stocks. During economic downturns, these bonds tend to maintain their value and continue providing predictable income through regular interest payments. As a result, they act as a safe haven for investors looking to protect their capital during periods of market volatility, enhancing overall portfolio resilience.

Related terms

Coupon Rate: The interest rate that a bond issuer pays to bondholders, typically expressed as a percentage of the bond's face value.

Yield to Maturity: The total return anticipated on a bond if it is held until it matures, factoring in both interest payments and any capital gains or losses.

Treasury Bills: Short-term debt securities issued by the U.S. Treasury that mature in one year or less, sold at a discount to their face value and do not pay periodic interest.