What is the Definition of T-Bond?
A bond is essentially a loan, usually for a fixed period of time and often with a fixed rate of interest due to the lender. A Treasury bond (T-bond) is such a loan where the U.S. Treasury Department is the borrower. T-bonds are identified by their maturity date and date of issuance.
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Features
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The face value of a Treasury bond, called par, varies, but is always a multiple of $100. Treasury bonds are issued with 10- to 30-year maturity and pay a fixed rate of interest, called the coupon, every 6 months. The interest on T-bonds is subject to federal taxation, but not state or local tax. T-bonds can be purchased directly from Treasury Department or through a broker, and exist in either paper certificates or electronic format.
Types
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Technically, T-bond refers specifically to a government security with a maturity of more than ten years, but in common usage, "Treasury bond" tends to refer to any fixed yield debt issued by the Treasury Department, of any duration. Treasury T-bills are issued with 91-, 182- and 364-day maturities. Treasury Notes are issued in 2-, 3-, 5- and 10-year maturities.
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Function
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The purpose of all bond issuance is to raise capital. In the case of the T-bond, the U.S. Treasury is seeking to finance its budget deficits, interest payments on its existing debt and other short-term obligations. The Treasury keeps a regular schedule of issuance, selling 30-year T-bonds in February, May, August and November. For investors, U.S. Treasuries are among the safest places to store wealth, and offer a modest rate of return.
Considerations
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The full value of a bond over time is par plus the coupon payments. And, because the coupon payments can also be reinvested, the potential value can be higher still. But,not all investors buy bonds with the intention of holding them to maturity, and because the Treasury market is extremely liquid, moving cash in and out of Treasuries is a relatively easy process. The decision t-bond investors must make is how much to pay presently to receive those payments in the future, and how shifts in interest rates and risk tolerance will affect what other investors will pay in the future.
Warning
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T-bonds are backed by the full faith and credit of the United States of America, and are therefore often considered as close to a zero default risk investment as there is. Certainly this was the hope of investors in late 2008 when they drove the yield on 10-year notes below 1 percent. However, because the United States government is so deeply in debt, with so many short- and long-term liabilities, it is entirely dependent on the investment of sovereign capital to finance its obligations. Any disruption in the investment of foreign money into Treasury debt could trigger a cascade of defaults on T-bonds, that, while unthinkable in most instances, would certainly result in unprecedented financial chaos.
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