How U.S. Government Bonds Work
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Introduction
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United States Government Bonds are debt securities. When the government needs to raise money to fund social programs or a war, it issues bonds. Investors buy the bonds and receive interest payments. Bonds are basically loans in which the investor is the lender. There are three types of government bonds: bills, notes and bonds. All these bonds have a fixed-interest rate which is paid twice a year. The investors pay only federal tax on the interest they receive. Government bonds are a sound investment for any portfolio.
How US Government Bonds Work
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Collectively bills, notes and bonds are called Treasuries. The main difference between the three is their maturity dates. Treasury Bills (also known as T-Bills) mature in less than one year. Treasury Notes mature in one, two, five and ten years. Treasure Bonds mature in more than ten years. The maturity date is the date by which the debt much be repaid. The amount borrowed is called the face value and the interest rate is usually called the coupon. If an investor buys a Treasury note for $2000 with a maturity date of ten years and an interest rate of 7%, this means that the investor gets $70 twice a year (or $140 each year) for the next ten years. When the bond becomes due, the investor is repaid his $2000.
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Why Invest in US Government Bonds
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Government bonds are a safe and stable investment. They are safer than municipal bonds and corporate bonds. While bonds do not have the excitement of the stock market, they are a conservative investment with guaranteed annual income from interest payments. Treasuries are fixed-income securities. This means that the interest rate never fluctuates and you always know exactly how much money you will get from the interest. Bonds are a good investment during a bear market when the stock market is falling in value. But it can also be a good investment during a bull market when the stocks are reaching new highs. Every investor must decide if government bonds are a good investment for his needs. While some may consider bonds boring others prefer this less risky and volatile form of investment.
How to Invest
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There are several ways you can invest in government bonds. Mutual funds that invest solely in Treasuries is the easiest option. You can also buy bonds through a broker, usually the same one that handles your stock trades. There are also bond brokers that deal exclusively in bonds but most of these require a $5000 initial deposit. Another method is to buy bonds directly from the government's website Treasury Direct. One advantage to buying from the Treasury is that there are no commission as you would pay with a broker.
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