Treasury Bond Rate Basics

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What is a Treasury Bond?

A Treasury Bond is a fixed government long term debt security, issued by the Bureau of Public Debt (BPD) existing in both paper and electronic form. Treasury Bonds are a 30-year investment that pays interest semi-annually and is tax-free income for state and local taxes, though federal income taxes still apply. For the government, Treasury Bonds are one form of public debt, meaning the money you purchase the bond with is borrowed by the government and must be paid back with interest.

How to Acquire Treasury Bonds

Treasury Bonds are not issued like traditional securities, rather they are auctioned off. The price and yield of T-Bonds are determined at the time of auction. There are two types of bids for T-Bonds: Competitive and Non-competitive.

1. Competitive Bids – the bidder sets the rate or yield they want for the band then, one of three scenarios can occur:

a. Your bid may be accepted in the full amount if your bid is equal to or less than the yield determined at auction

b. Your bid may be partially accepted if your bid is equal to the high yield, or

c. Your bid may be rejected if the yield you specify is higher than the yield set by the auction.

2. Non-Competitive Bids – the bidder receives bonds for the entire amount they want to purchase, but they have to accept the rate or yield as it stands. If your goal is to purchase a bond regardless of rate, this is the right bidding option to use.

Treasury Bonds can be issued to individuals or businesses via a bank, broker, dealer or by using the online Treasury Direct website. However, at this time only individuals can have an account with Treasury Direct.

Rates and Terms of Treasury Bonds

Individual government T-Bonds are issued in 30-year terms and offered in multiples of $100.00. Price and rate are determined at the time of auction with the price of a bond dependant on its yield to maturity (YTM) and the interest rate.

  • If the interest rate is less thant the YTM, then the price of the bond will be less than par.
  • If the YTM and interest rate are equal, then the price and par amount will be equal.
  • If the interest rate is greater than the YTM, then the price will be greater than the par amount.

Once you have the bond you can either keep it until it matures or sell it before it matures within the secondary market. If you keep your bond until maturity you can either redeem the bond or reinvest it in another government bond.

Taxes, T-Bonds, and You

The interest earned on Treasury Bonds is exempt for state and local taxes, however federal taxes must still be paid on interest. A 1099-INT form will be given to you each year to file with your federal taxes. Visit the Internal Revenue Services publication on filing for interest earned. Always keep in mind that interest generally counts as income and is subject to federal tax, so it is inadvisable to not report it each year.

Treasury Bonds are safe from default risk and therefore may make a good investment for your hard earned money.