Negotiable U.S.
Government debt obligations, backed by its
full faith and credit.
Treasuries are issued by the U.S. government in
order to
pay for government
projects. The
money paid out for a
Treasury Bond is essentially a
loan to the government. As with any loan, repayment of
principal is accompanied by a specified
interest rate. These
bonds are guaranteed by the "full faith and credit" of the U.S. government, meaning that they are extremely
low risk (since the government can simply print money to pay back the loan). Additionally, interest earned on Treasuries is
exempt from state and
local taxes.
Federal taxes, however, are still due on the earned interest. The government
sells Treasuries by
auction in the
primary market, but they are
marketable securities and therefore can be purchased through a
broker in the very active
secondary market. A broker will
charge a
fee for such a
transaction, but the government
charges no fee to participate in
auctions. Prices on the secondary
market and at auction are determined by
interest rates. Treasuries issued today are not
callable, so they will continue to
accrue interest until the
maturity date. One possible
downside to Treasuries is that if interest
rates increase during the term of the
bond, the money invested will be earning less interest than it could earn elsewhere. Accordingly, the
resale value of the bond will decrease as well. Because there is almost no risk of
default by the government, the
return on a Treasury bond is relatively low, and a
high inflation rate can erase most of the
gains by reducing the
value of the principal and interest
payments. There are three
types of
securities issued by the
U.S. Treasury (bonds,
bills, and
notes), which are distinguished by the
amount of time from the initial
sale of the bond to
maturity.
