USA Government Bonds
The U.S. government issues bonds to cover the operating costs of the federal government. Because these securities are backed by the full faith of the U.S. government, many investors consider them among the safest investments in the world. There are several types of securities offered by the U.S. government and its agencies, offering options for all types of investors.
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Treasury Bills, Notes and Bonds
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Treasury bills, notes and bonds are all U.S. government bonds, divided into groups by maturity date. Bills are short-term bonds, with maturity dates anywhere from a week to a year in the future. Notes are slightly longer -- maturity dates between two to 10 years -- and bonds are the longest, with maturity dates longer than 10 years. In 2011, Treasury bonds were issued with 30-year maturity dates. Both notes and bonds pay interest on a semiannual basis, while bills are zero-coupon bonds, paying interest only on maturity.
TIPS
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Treasury Inflation Protection Securities (TIPS) are designed to protect investors from the effects of inflation on long-term investments. The principal value of TIPS is adjusted on a regular basis to reflect inflation or deflation. If the consumer price index (CPI) goes up, the principal value of the bond goes up. The reverse is true if the CPI goes down. When the bond matures, the investors are paid the inflation-adjusted principal or the original principal value -- whichever is larger. Interest payments are made semiannually. The interest rate is consistent throughout the life of the bond, but payments may change based on the current inflation-adjusted value of the principal.
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Savings Bonds
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Savings bonds are similar to Treasury bonds and notes, but, unlike Treasury securities, they cannot be traded with other investors. Savings bonds come in two forms: I and EE. I bonds, like TIPS, are designed to reflect inflation over time. I bonds have two interest rates: a set value and a variable rate that changes with the rate of inflation or deflation. I bonds pay interest on a semi-annual basis. EE bonds are zero-coupon bonds, meaning they do not pay interest until you cash them in. Both I and EE bonds may be redeemed prior to their maturity dates, but there may be penalties if you do so.
Related Securities
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There is a fourth type of U.S. government security: agency bonds. Agency bonds are issued by entities that do business on behalf of specific government projects or agencies. The most well known of these are the mortgage companies commonly referred to as Freddie Mac, Fannie Mae and the Federal Home Loan Mortgage Corporation (FHLMC). These companies issue securities based on mortgage contracts acquired through these programs. In some cases, these companies -- such as Freddie and Fannie -- are privately held corporations and are not part of the U.S. government directly, and their securities should be evaluated accordingly.
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