How U.S. Treasury Bonds Work

The U.S. Department of the Treasury sells treasury bonds to investors around the world.

The U.S. Department of the Treasury sells treasury bonds to investors around the world.

The federal government requires money to operate. A primary source of funding the federal government comes from the sale of debt instruments such as U.S. Savings Bonds, treasury bills, treasury notes and treasury bonds, which are considered among the world's safest investments. The U.S. Department of the Treasury is charged with managing the sale and redemption of these securities.

Identification

The primary types of debt securities offered by the U.S. Department of the Treasury include the familiar U.S. Savings Bond, treasury bills, treasury notes and treasury bonds. Each of these securities are backed by the full faith and credit of the United States government, making them among the safest of all investments. But there are important differences between them. U.S. Savings Bonds are currently sold at face value in amounts greater than $25. Bills are sold at a discount from face value and typically mature is one year or less. Notes are sold at auction at a price that may be greater or less than face value and typically mature in 10 years or less. Bonds are sold at auction at a price that may be more or less than face value and typically have a 30-year maturity.

Time Frame

The U.S. Department of the Treasury holds original issue treasury bond auctions four times per year: in February, May, August and November. It offers reopened auctions during the other eight months of the year. Reopened bonds involve the sale of additional amounts of previously issued bonds. These bonds will have the same interest rate and maturity date as the originally issued bonds, but may sell at a different price based upon prevailing interest rates.

Purchasing

Individual investors may purchase treasury bonds from qualified investment brokerage firms, from banks or directly from the U.S. Department of the Treasury. Individuals who wish to purchase treasury bonds directly from the Treasury Department must have an account with TreasuryDirect. Opening an account requires the individual investor to provide her social security number, address of record, bank account information and email address. Investors must have access to an Internet browser that supports 128-bit encryption. Once the investor has established her account, she may immediately log onto her account and purchase treasury bonds by selecting the particular issue she wants for the amount she wants, then clicking the Buy Now button.

Considerations

All treasury bonds are sold in electronic form, although some older paper bonds are still in circulation. The U.S. Department of the Treasury pays interest on treasury bonds to the holder of record every six months. Treasury bonds can be purchased in face value increments of $100 and are redeemed upon maturity for their full face value. There is a robust secondary market for treasury bonds, so investors do not have to wait for the bonds to mature prior to cash them in. Interest received on treasury bonds is taxable on federal income tax returns, but is exempt from income taxes at the state and local level.

 

About the Author

After attending Hardin Simmons University, Kay Dean finished her formal education with the Institute of Children's Literature. Since 1995, Dean has written for such publications as "PB&J," Disney’s "Family Fun," "ParentLife," "Living With Teenagers" and Thomas Nelson’s NY Times bestselling "Resolve." An avid gardener for 25 years, her experience includes organic food gardening, ornamental plants, shrubs and trees, with a special love for roses.

Photo Credits

  • Department of Treasury Building image by dwight9592 from Fotolia.com