Treasury Bond: How To Purchase?

A Treasury bond, or “T-bond,” is a debt issued by the U.S. government to raise money. When you purchase a T-bond, you lend the federal government money at a specified interest rate until the loan matures.

A bond is only a loan made to a specific organization, such as a firm, municipality, or in the case of a treasury bond, the federal government. You make an initial loan payment, known as the principal, and receive interest payments until the debt is repaid or reaches its maturity date. At maturity, you should receive the principal in full, together with the final interest payment due.

Technically, all of the below-discussed securities are bonds, but the federal government uses the word “Treasury bond” to refer to its long-term basic security. The Treasury issues 30-year and 20-year bonds that pay interest every six months. You are not required to hold the bond for the entire time. Bonds purchased directly from the Treasury must be held in your account for 45 days prior to sale.

The titles “note” and “bill” are reserved for bonds with shorter maturities. The maturities of Treasury bills range from four weeks to one year. The maturities of Treasury notes range from two to ten years.

All maturities of U.S. Treasury securities provide an essentially assured source of income and maintain their value in virtually every economic climate. This makes them extremely attractive to large and small investors during periods of economic turmoil.

Regardless of your age or investment objectives, you should include at least a small portion of your investment portfolio in bonds. And Treasury bond securities — issued by the United States government — are the safest of high-quality treasury bond and make an excellent portfolio linchpin. Keep in mind that because Treasury securities contain relatively little risk, their interest rates are often lower than those of corporate bonds or municipal bonds.

These sorts of securities are completely backed by the U.S. government, thus the likelihood that you will not receive your investment back is extremely low.

 

Inflation and Federal Reserve Policy

The Federal Reserve, also known as “the Fed,” is the nation’s central bank. It determines the monetary policy for the nation and controls inflation. The Fed may decide to increase short-term interest rates if inflation increases. In order to prevent the economy from overheating, the demand for loans will be decreased.

Intermediate and long-term rates typically increase as well when the Fed raises short-term rates or when it is anticipated that it would do so in the future. Rising yields equate to declining treasury bond prices since bond prices and yields move in the opposite manner. As a result, your fixed-income investment will be worth less.

Real returns versus nominal returns

Less visible is inflation’s second effect. However, it can significantly reduce the profits from your portfolio. The “actual” return differs from the “nominal” return in this effect. A treasury bond or bond fund’s nominal return is what it promises to do on paper. Inflation adjustment is made to the real return.

 

The Bottom Line

Your long-term investments’ value will always be slowly being eaten away by inflation, which is a stealthy robber. You will be able to stay one step ahead of it with some preparation.

 

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