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T-bills, Treasury notes, Treasury bonds
How they're valued: Treasury bills, or T-bills, are short-term debt instruments the U.S. government issues to raise money to pay for projects and pay its debts. Maturities of T-bills range from a few days to 52 weeks.
T-bills technically are not interest-bearing. They are sold at a discount from their face value but when they mature, the government pays you full face value. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.
Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years and pay interest every six months until they mature. The price of a note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which effectively reduces investor return. Upon maturity, investors are paid its face value.
Treasury bonds are issued with 30-year maturities and pay interest every six months. They are sold at auction four times a year: in February, May, August and November. The price and yield are determined at auction. Upon maturity, you are paid face value plus interest.
All three types of Treasury securities are offered in increments of $100.
Risks: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. You can count on getting interest and your principal back at maturity. However, the value of securities fluctuates, depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. Therefore, if you try to sell your bond before maturity, you may experience a capital loss.
Treasuries also are subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power.
Because they mature quickly, the risk of holding T-bills is not as great as with longer-term T-notes or Treasury bonds.
Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains or losses, depending on the interest rate environment (see risks, above).
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