What Is A Treasury Bond?

The “T” Bond

A treasury bond is often referred to in trading terms as simply the “T Bond”.  The treasury bond is a tried and trusted facet of the investment sector and has been in use in the United States as a government backed investment option since 1929.  They were created out of the need to secure money for the government when no other source was available to borrow from.  In this sense the very citizens of a nation finance their own government in exchange for accrued interest over a period of time. The typical treasury bond has a life-span of 20-30 years, which is why they are often referred to as the “Long Bond” when compared with a treasury note or treasury bill.  Those investment options carry anywhere from a several month investment contract to a few years.  The treasury bond is for the long term investor looking to keep their money in a safe place while accruing interest at a predictable and guaranteed rate.

How Treasury Bonds Work

Treasury bonds work similar to an investment in any other government bond or CD with some small differences.  In the case of a treasury bond, as stated, your investment period will be very long.  You will not have access to the money during this period except to prematurely cash them in with significant loss in value.  A treasury bond works like this:

A bond is issued for what is reffered to as its “face value”.  In this example lets say the treasury bond has a face value of $10,000.  The face value is what the bond will be worth, meaning what you can trade it in for with the U.S. government, once it reaches its maturity date.  The maturity date, much like the face value is clearly marked on the note.  The purchase price of the treasury bond will vary depending on how near the maturity date is.  For example if the $10,000 face value bond was to be purchased in 2005 for a maturity date of 2025, the amount would be much lower, such as $8,000 or so.  If the maturity date was much nearer, say 2010, the discount price or purchase price would be much nearer to the face value price, say $9,600.  The difference of $400 which would be made over the next 5 years would be the return on your interest.

Treasury Bonds And Taxes

Keep in mind when comparing a treasury bond to a privately held stock bond that the IRS charges you differently, not assessing any income tax on your earnings until the maturity date.  In this way a treasury bond can end up making you more money in the long run than other investment options such as heavily taxed stock dividends.

Related posts:

1. What Is Bond Maturity?
2. What Are Treasury Bonds?
3. What Is The Interest Rate On A Bond?
4. What Are Convertible Bonds?
5. What are Government Bonds?