US Treasury bonds

Definition

US Treasury bonds (T-bonds) are long-term debt securities issued by the US Department of the Treasury. They have maturities ranging from 10 to 30 years and pay periodic interest until maturity.

5 Must Know Facts For Your Next Test

1. US Treasury bonds are considered one of the safest investments because they are backed by the full faith and credit of the US government.
2. The interest earned on T-bonds is exempt from state and local taxes but subject to federal taxes.
3. Treasury bonds can significantly impact a firm's weighted average cost of capital (WACC) as they often serve as a benchmark for the risk-free rate.
4. T-bonds are sold through auctions conducted by the US Treasury, where both competitive and non-competitive bids can be placed.
5. The yield on T-bonds influences other interest rates in the economy, including those for corporate bonds and loans.

Review Questions

• What makes US Treasury bonds one of the safest investments?
• How does the yield on US Treasury bonds affect a firm's weighted average cost of capital (WACC)?
• In what way are T-bond interests taxed differently compared to other types of income?

Related terms

Corporate Bonds: Debt securities issued by corporations to raise capital, typically offering higher yields than government bonds but with higher risk.

Risk-Free Rate: The theoretical return on an investment with zero risk, often represented by the yield on US Treasury securities.

Weighted Average Cost of Capital (WACC): A calculation that reflects a company's cost of capital from all sources, including equity and debt.