Types of U.S. Treasury Securities
The U.S. Treasury issues several types of securities, each backed by the full faith and credit of the U.S. government and offering interest income that is exempt from state and local income taxes. Here are a few things to know about some of them.
Treasury Bonds – These are issued for relatively long terms of 20 and 30 years. They pay a fixed rate of interest every six months until they mature, at which time you are paid the bond’s face value.
Treasury Notes – These are issues for terms of 2, 3, 5, 7, and 10 years and pay a fixed rate of interest every six months. At maturity, you are paid the note’s face value.
Treasury Bills (T-Bills) – These have shorter terms that are generally issued for terms of 4, 8, 13, 26, and 52 weeks. Instead of paying interest periodically throughout the bill’s term, Treasury bills are usually sold at a discount from their face value and are redeemed at their face value at maturity. The difference between a bill’s purchase price and its face value is the interest.
Treasury Inflation-Protected Securities (TIPS) – TIPS offer protection from inflation and are issues for terms of 5, 10, and 30 years. Although they pay a fixed rate of interest every six months, TIPS’ principal is adjusted for inflation based on changes in the Consumer Price Index. As a result, TIPS’ interest payments fluctuate in value – increasing when inflation occurs and decreasing when deflation occurs. At maturity, you are paid the adjusted principal or the original principal, whichever is greater.
Floating Rate Notes (FRN) – These are issued in for a term of 2 years and pay interest quarterly. The interest rate used to calculate the interest payments is reset weekly. Because the interest rate varies over the note’s term, the amount of interest paid quarterly will also vary. You are paid the note’s face value at maturity.
*please note: the government backing on U.S. Treasury securities refers only to the timely payment of interest and principal. It does not eliminate market risk. If you sell a Treasury security before its maturity date, you may receive more or less than you paid for it.
Bonds are subject to interest rate risk. When interest rates rise, bond prices usually fall. The effect is usually more pronounced for longer-term securities. Fixed-income securities also carry inflation risk and credit and default risks for both issuers and counterparties.
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Article published in March 2021 edition of Eye on Money. If you would like to be added to our mail list please email firstname.lastname@example.org.