How Do Treasury Bonds Work
US Treasury Bonds are widely regarded as one of the safest possible investments form default. Many people use the words “Treasury Bonds” generically to refer to any public debt issued by the United States Treasury. However, Treasury Bonds refers to a particular form of security issued by the Treasury.
The definition of Treasury Bonds is a debt security issued by the Unites States Government with a maturity of thirty years. In other words, only bonds sold by the U.S. with a 30-year maturity are technically considered Treasury Bonds. Treasury Bonds were brought back after a hiatus in 2005 in order to finance a growing public debt.
Treasury Bonds pay interest every 6 months and are issued in multiples of $100. Treasury Bond interest is exempt from state taxes, but not from Federal Income Taxes. Paper Treasury Bonds are no longer issued by the government, however, because of their long maturities, there are still many 30-year Treasury Bonds in paper form held by investors around the world. Treasury Bonds may be purchased by individuals and other retail investors directly through the Treasury Bond website called Treasury Direct at www.treasurydirect.gov (Be sure to get the gov right.)
The Interest rates on Treasury Bonds are set by public auction. Interested parties submit bids to purchase the bonds being auctioned. Each bid is for a specific amount of bonds at a specified interest rate. The auction works by awarding the requested amount to each bidder in order from the lowest bid interest rate to the highest interest rate bid. When the total amount to be auctioned has been fulfilled, the remaining bidders, who requested higher interest rates, are not awarded any Treasury Bonds.
Non-competitive bids can also be entered. These bids are fulfilled at the interest rate set by the auction, whatever that may be. These type of bids are the equivalent of a market order for bond auctions.
Read more about Treasury Bond Rate Auctions.