What Are Treasury Bonds Paying?
Treasury bonds make interest payments semi-annually. In investment terms, the interest payment is the coupon of a bond. The coupon or interest rate depends on many factors, such as the original date the Treasury put the bond up for sale and current economic market conditions. Treasury bonds have a term of 30 years, after which the bonds mature and the principal value of the bond pays to the investor.
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Buying Bonds
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Treasury bonds are available for purchase directly from the government primary market in a Treasury auction, or on the secondary market such as the New York Stock Exchange. A primary market is where new bonds issue for the first time from the Treasury and become available for sale. Secondary markets are where bonds buy and sell between investors who already own bonds. When Treasury bonds sell on the primary market at auction for the first time, the price and interest rate of the bond are determined. The price of the bond does not necessarily equal the face value printed on the bond, and the interest rate will be determined by economic market prices. For example, a $10,000 bond can sell in the market at a lesser price, such as $9,500.
Coupon and Market Yield
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The coupon rate is the actual interest payment amount of the bond, and is determined at the primary auction. For example, the Treasury may offer a 30 year bond with a coupon rate of 5 percent. If an investor owns $10,000 worth of bonds, he will receive interest payments of $250 twice a year for a total of $500 in interest annually. The 30 year Treasury bond market yield is different then the actual coupon amount the bond pays. Market yield is the coupon rate divided by the market price of the bond and represents the total return of the bond, not the amount paid.
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Premiums and Discounts
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Treasury bonds are available for purchase on the secondary market with coupon rates that are higher than normal market rates. To purchase this type of bond, the investor will pay a premium to get the higher interest rate, which means that he will pay more than par value for the bond. For example, to purchase a $10,000 treasury bond paying 8 percent the investor will have to pay more than $10,000 to obtain the additional 3 percent in interest. Alternatively, if an investor buys a bond with a lower-than- market yield he will purchase the bond at a discount, and pay less than $10,000 to buy the bond.
Current Rates
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The Treasury publishes current and historical Treasury bond yields, which were around 4.5 percent at the time of publication. From 2008 to 2011 rates have fluctuated from record lows below 3 percent to amounts just under 5 percent. 30 year mortgage rates parallel the 30 year Treasury bond very closely, which is one reason the 30 year Treasury bond number is so important to the economy and is watched closely by economists.
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