- Treasury bonds are auctioned when first time issued in the primary market.
- It gives a fixed rate of interest as the government can increase tax when it is needed.
Treasury bonds are debt security issued by the US federal reserve on behalf of the US federal government , which has a maturity period of 20 years to 30 years. The holder of the bond earns a fixed rate of interest which is paid periodically and is redeemed at par at the time of maturity.
The US government issues four types of debt security: Treasury bill, Treasury bond, Treasury note, and Treasury inflation-protected security(TIPS).
All these instruments are the safest instrument in their category as they are backed by the US government and are seen as a secure source of income as it gives a fixed rate of interest, but being the safest instrument, it lacks the return it offers, it gives the lowest return in the category. Generally, the maturity period of the bond is 20 to 30 years.
Treasury bonds are auctioned every month, 4 per year is the original issue, and 8 per year is reopenings in an online auction organized by the US treasury, and the price of the bond is determined in the auction itself by market forces. The interest is paid semiannually on the bond.
Once the bonds are auctioned, they can be sold in the secondary market, and they are issued with the minimum denomination of $100 and are purchased in the denomination of $100 on which coupon rate is attached, which is paid semiannually.
A treasury bond can be bought or buy by participating in auction, an individual can take part in noncompetitive bid through a TreasuryDirect account, a bank, broker, dealer can take part in both competitive and noncompetitive bid (TreasuryDirect is the official application of US government to buy and hold Treasury marketable security).
Treasury bond price and bond yield have an inverse relation as the price of the bond goes up, the bond yield reduces, and if the price reduces, the bond yield increases.
On maturity, when the term/duration of the treasury bonds gets over, the investor has two options: either he/she can withdraw the whole amount or he/she can reinvest in the same security for one more time.
The secondary treasury bond market is a highly liquid market where a bondholder is legally required to hold a bond for more than 45 days.The bond market is also known as the debt market or credit market. Currently, the size of the global bond market is $133 trillion, in which America has the highest share with $51 trillion, and in the US debt market also, major transactions of bonds take place.The present rate of interest on 20 year treasury bonds is 3.875%, and on 30-year bonds are 3.625%. It hasn’t gone below 0.125% till date.
Only federal tax is imposed on the earning of the interest; no state or local tax is charged on treasury bonds.
People purchase treasury bonds with the investment perspective as a constant and secured source of income after their retirement. Another point of view can be, saving money for future major expenses like education, buying a house, etc.
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