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  CDs and Investing Basics   Chapter 3: Investing in bonds
Bewildered by bonds? Troubled by Treasuries? We've got you covered -- from savings bonds and beyond!
 
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U. S. Treasury securities

 

A bond, according to Webster's dictionary, is an interest-bearing certificate issued by a government or business promising to pay the holder a specified sum on a specified date.

Bills, notes, and bonds
U.S. Treasury bills, notes and bonds and U.S. savings bonds are excellent, risk-free ways to preserve your principal, get pretty good returns and keep your investments relatively liquid.

The government sells Treasury securities -- bills, notes and savings bonds. In addition, U.S. Treasury bonds are available on the open market. All of these are debt instruments sold to raise money to operate the government and pay off debt. Treasury securities are safe investments because they're backed by the U.S. government.

The minimum amount required to buy a Treasury bill or note is $1,000. Savings bonds can be purchased for as little as $25.

Bonds:

Treasury bills (T-bills) are short-term securities that mature in one year or less. You buy them for less than par (face) value. When the bill matures, you receive par value. For example, you might buy a $10,000 26-week T-bill for $9,750. If you hold it until maturity, you'll be paid $10,000. That extra $250 is the interest you earned.

Treasury notes mature in two to 10 years.

Treasury bonds were issued in maturities of 10 to 30 years, but the Treasury stopped issuing fixed-principal bonds in October 2001. Many of the bonds are still outstanding and earning a fixed rate of interest semi-annually. If someone cashes a bond before maturity, you can buy what's left of that bond on something called the secondary market. A broker can help you make the purchase.

Both notes and bonds pay a fixed rate of interest every six months until the security matures. Par value is repaid when the security matures.

Treasury bills, notes and bonds are transferable -- you can buy or sell them in the securities market.

Treasury bills and notes are sold through competitive and noncompetitive bidding at more than 150 auctions held throughout the year. Many newspapers report auction schedules. You can also find auction schedules on the government Web site.

Auction dates are announced seven to 10 days before the auction. The Web site also has detailed information on how bids are placed. There are no fees when you buy Treasuries directly from the government.

You can also buy Treasuries on the securities market through a broker or dealer. If you choose that method, you'll pay a commission and perhaps a transaction fee.

The income you earn on Treasuries is exempt from state and local taxes.

-- Posted: May 1, 2006
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