Treasury Bonds: How Do They Work and How to Buy Them

There’s no such thing as a risk-free investment, but if there was it’d be treasury bonds. Interest is paid semi-annually and taxed only at the federal level.

Now that you understand corporate bonds, let’s get down to the less risky treasury bonds. Learn about what they are, how treasury bonds work and how you can buy them.

What are treasury bonds?

A treasury bond is a marketable, fixed-interest U.S. government debt security with a maturity of 10+ years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level. You can buy them from the US treasury website, or through a broker.

How do treasury bonds work?

U.S. Treasuries carry the full faith and credit of the U.S. Federal government. Therefore, purchasing Treasuries eliminates much of the risk associated with most investments. As you can imagine, in return for this minimized risk, your earnings rate will also be less than with most of the more “exotic” investment choices.

Treasuries, particularly the 3-month Treasury bill, are sometimes quoted as the “risk-free rate of return,” the minimum rate of return an informed investor will accept for enjoying the minimum risk. In the real world there is no true risk-free investment, although Treasuries do come close.

To buy treasury bonds

If you’re not planning on buying multiple types of securities, the US Treasury allows investors to buy and sell bonds directly through their site, TresuryDirect.gov, without having to work with a broker or bank. Simply create an account and supply the requested information to make the purchase.

Choosing a broker

If you’re a borrower who plans to buy multiple kinds of bonds, purchase and trade often, or purchase and trade other kinds of securities such as stocks, you should consider using a broker to manage your investment activity. Investment brokers can help you develop and implement an investment strategy.

Brokers can be generally categorized as either discount or full-service brokers.

Full-service broker: A full-service brokerage can be as personalized as an agent who develops an investment strategy for you, and even buys and sells on your behalf with your permission.

Discount brokers: If you’re investing a small amount of money or are new to investing, this is probably the way to go. Like their name suggests, are affordable trade facilitation services. This may be as basic as an e-trade account, where you register with the broker, e-trade, and use their service to buy, sell, and monitor your investments. Using a discount broker will save you the higher cost of full service, and give you the opportunity to learn a bit about trading while making your first investments. Most discount groups like eTrade or Scottrade provide investors with learning materials, so you won’t be completely on your own.

Treasury Bond Auctions

Treasury bond auctions are made up of two phases, first of competitive and then of non-competitive bidding.

Competitive bidding: these guys are usually institutions or market experts, and they bid against each other for bond par value. They bid stating the amount of par value they want to buy and the yield they want to receive. The Treasury awards bids starting with the bid for the lowest yield, although no one bidder can buy more than 35% of the total offering.

Non-competitive bidding: this is the most common form of bidding for new or modest sized bond purchases. Non-competitive bidders agree to accept the high yield determined by the competitive auction, and specify the amount of bond par value they will purchase.