Treasury Bond (T-Bond) - Explained
What is a Treasury Bond?
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Table of ContentsWhat is a Treasury Bond?How Does a Treasury Bond Work?Maturity Range for Treasury Bonds
What is a Treasury Bond?
A treasury bond is a US government debt instrument issued to finance government budget as an alternative to taxes. Treasury Bonds (T-bond) usually have the longest maturity at thirty years, with a coupon issued payment issued every six months. Taxes on T-bonds are only taxed at the federal level, and they are risk-free investments.
How Does a Treasury Bond Work?
The U.S. Department of the Treasury issues four different types of bonds in order to finance government budgets. There are Treasury Bonds, Treasury Notes, Treasury Receipts and Treasury Inflation-Protected Securities. Each has a different maturity date and coupon payment rate. Each of the treasuries issued are generally risk free since they have government backing. Investors do not worry about getting repaid, since the government can increase taxes, or reduce allocations to a sector to pay back these debt instruments. Treasuries also have the lowest investment returns, but are risk-free and thus said to be more profitable to wealthier investors.
Maturity Range for Treasury Bonds
T- bonds can stay up to thirty years before qualifying for repayments depending on the worth. Most are usually repaid within 10-30 years, but it is unusual to see repayments before 10 years and after 30 years. T-bonds are issued in denominations of $1000 (10 T-bonds would cost $10,000) and coupon payments are released once every six months. Bonds are given in two forms; competitive and non-competitive bid. Non-competitive bids are sold through auctions, where investors have to bid and the highest bidder up to $5 million is awarded the bond. However, in a competitive bond, investors are usually big corporations and are limited to 35% of the total bond available to the public. Also, in a competitive bid, the buyer has a say in the rate of the bond, while a non-competitive bond forces buyers to accept any set-rate at the point of issuance. Non-competitive bonds can be resold by these big corporations in the market to smaller investors in parts. The presence of a secondary market for selling T-bonds results in liquidity and fluctuation of value. Most sellers general dictate the rate at which they are willing to sell and not the buyers as in a competitive bond. In the secondary market, the auction rates increases when prices are lower, and decreases as prices go higher. This is because bonds with higher rates gets discounted. Treasury bond returns help to form the yield curve in a fixed income market. The yield curve contains all investments issued by the US government. In drawing the yield curve, returns with higher maturing are usually upward sloping (just like the supply curve), while those with lower maturities offer lower returns. However, in a case where bonds with higher maturity are in high market demand, the yield curve would experience an inverted movement (more likely like a demand curve), and returns might get lower than those with lower maturities.