How Do 30-Year Bonds Work?

A long-term bond can provide you with income for many years.

A long-term bond can provide you with income for many years.

Bonds of any kind are fixed-income securities. This means you get paid a guaranteed amount of interest for the life of the bond. Usually, the interest is paid every six months. When you buy a 30-year bond, you can look forward to a steady income stream for many years. However, 30-year bonds carry some special risks. Knowing how these bonds work will help you manage the risks and make the most of your investment dollar.

Description

A 30-year bond is just what the name implies. State and local governments, the Treasury Department and corporations issue bonds to borrow money for periods ranging from a few months to decades. If you buy a 30-year bond when it’s issued, it will pay interest until it matures in 30 years. At the end of this time, the bond issuer repays the borrowed money, which is called redeeming the bond.

Maturity

Thirty years is a long time, and it’s hard to be sure what events will transpire that far in advance. Interest rates can change a lot in just a few years, so what seems to be a good rate now might not be so good in 10 or 15 years. A seemingly sound company could fall on hard times and be unable to pay off the bond in three decades. Plus, inflation could reduce the buying power of the dollars you invest in a 30-year bond. To offset these risks, investors want better interest rates. This investor demand means 30-year bonds typically pay higher interest than shorter-term bonds.

Callable Bonds

When a companies and governments sell 30-year bonds, they face a risk interest rates might drop in the future, leaving them stuck with paying relatively high interest rates. To protect themselves, bond issuers may add a call feature when they sell long-term bonds. This allows them to call, or redeem, the bonds early. Then the bonds can be reissued at lower interest rates. That’s good for the bond issuer, but not for investors. Callable 30-year bonds usually pay a higher interest rate to compensate investors for the added risk.

Savings Bonds

U.S. savings bonds have maturities of 30 years, but they work differently than other long-term bonds. Interest isn’t paid out periodically. Instead, interest accumulates, and you get everything at once when you redeem a savings bond. Savings bonds can only be bought or redeemed through Treasury Direct online or, for paper bonds, redeemed at banks and other financial institutions. Savings bonds have no call feature. However, you can redeem the bonds anytime after the first year. You do forfeit three months’ interest if you redeem a savings bond in less than five years.

 

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