Treasury securities come in three basic types:
1. Treasury Bills (T-Bills)
2. Treasury Notes (T-Notes), and
3. Treasury Bonds (T-Bonds)
The main differences between Treasury Bills, Notes, and Bonds lies in the minimum dollar amounts required to invest in them and the length of their maturities.
TREASURY BILLS are short-term loans to the U.S. Government and reach maturity in a year or less.
Unlike T-Notes or T-Bonds, T-Bills do not pay interest before maturity.
Rather, they are sold at a discount to their face (“par”) value, and the investor receives the difference between the original purchase price and the par value once the bill matures.
TREASURY NOTES and TREASURY BONDS are sometimes called “coupon securities.”
They pay a stated interest rate that is determined at the time of their original sale.
T-Notes have a term of at least one year, but not more than ten years.
T-Bonds are long term obligations with a term of ten years or more.
The investor receives interest payments on a semi-annual basis and, once the security reaches maturity, the investor will receive the full par value.
The interest payments are federally taxable, but exempt from local and state taxes.
T-Bills, T-Notes, and T-Bonds securities all share in common the fact that they are all free of credit risk as they are backed by the full faith and credit of the U.S. Government.
What this means is that, as long as the U.S. Government is alive and kicking, your investment is 100% secure!
You will always know exactly when and how much your investment will return.
No other bond investment, including mutual funds, can make this claim.
The other advantage to investing in U.S. Government securities is that they are the only fixed-income instruments that the individual investor can purchase without having to go through a broker or financial institution.
This means that there are no commissions or fees to pay, and that the entire amount of your purchase goes towards your investment.
When poor economic conditions are on the horizon, investors are more likely to put their money in investments that offer the highest degree of security.
Because no other fixed-income instruments can lay claim to a higher credit quality than U.S.A. Government securities, they are the ideal hedge against economic downturns.