What Does It Mean if a Treasury Bond Matures?
Investors who purchase bonds simply lend funds to an issuer, and in return, they receive a promise to repay or an "IOU." Most commonly, issuers are state governments, local municipalities, public agencies, the federal government or private corporations. Investors who purchase Treasury bonds lend the federal government money for a specified term and receive fixed interest payments until their bonds mature. Once their bonds mature, the Department of the Treasury returns their initial investments.
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Treasury Bond Basics
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The U.S. Department of the Treasury sells federal government Treasury bonds to individual investors, businesses, trusts and estates. The federal government sells its Treasury bonds through TreasuryDirect, which issues security bonds for terms of at least 10 years, and as of 2011, investors can only purchase 30-year bonds. These Treasury bonds mature in 30 years, and investors can wait 30 years before they can redeem their original investments, or they can redeem their investments by selling them before they mature. Investors can purchase Treasury bonds in increments of $100 with a minimum investment at $100. A single investor can purchase up to $5 million in Treasury bonds.
Full Faith and Credit
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The federal government promises to repay their bonds under the Full Faith and Credit Clause of the U.S. Constitution. Because of the federal government's constitutional duty to repay its debts, Treasury bonds are generally categorized as low-risk or no-risk investments, and as low-risk investments, they pay lower returns than other higher-risk securities, such as stocks. The 30-year Treasury bonds pay interest every six months.
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Tax Implications
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The Treasury bond interest rates depend on the auction selling prices. Investors receive fixed rate interest payments every six months, which are subject to federal taxes but are not subject to state or local government taxes. Investors receive 1099-INT annually to report their interest payments to the IRS. Taxpayers can pay their earned interest payments annually or they can request an automatic 50 percent withholding to pay their income taxes incrementally. Although interest is taxable income under the federal tax code, investors are not required to pay taxes at maturity.
Options at Maturity
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Investors receive fixed interest payments every six months until their bonds mature. Interest payments are taxable investment income, and taxpayers must report their interest earnings on their 1099 tax forms. Bondholders can sell their bonds at auctions before they mature. Investors can also reinvest their original investments once their bonds mature by purchasing the same types of bonds as originally purchased. Investors who choose not to reinvest their Treasury bonds at maturity receive the original face value of their investments via direct deposit from TreasuryDirect.
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