Treasury Bonds

Treasury bond, a US government debt security, will pay a fixed rate of interest until it reaches maturity, and it is issued for a 30-year term. TreasuryDirect, a major source of these bonds, generates accounts for individuals, estates, trusts, partnership, corporations and related registration types.

What purchasing a Treasury bond entails
The minimum purchase price of a Treasury bond is $100, and the maximum purchase price at an auction is $5,000,000 (in non-competitive bidding) or 35% of the offering you make (in competitive bidding). You can make investment increments in multiples of $100, and the format for bonds is electronic. If you have paper certificates that you want to convert to the electronic format, this can be done by contacting TreasuryDirect.

Paying for a Treasury bond
These bonds are an excellent way to finance your child’s education, supplement your retirement income or add to your investment portfolio. When your bond matures, the payment you receive will equal its face value. You will also be free to hold the bond until that time or sell it at an earlier date. Both the yield and price of a bond are determined at auction, and the selling price may be less than, equal to, or greater than the Treasury bond’s face value.

How to bid on a Treasury bond
Treasury auctions, occur regularly, have a set schedule, and are announced beforehand through press releases and notices in most major newspapers. Your bid must conform to the auction rules, and the prevailing terms and conditions found in the auction announcement. No more bids (or changes to them) are allowed once the auction is closed, and you must make full payment if your bid is accepted.

The types of bid you can make
If you are interested in purchasing a Treasury bond, note that two categories of bids are accepted at an auction:
1. If you make a noncompetitive bid, you must agree to the interest rate established at the auction, and your bid ensures that the exact specifications of your order will be met. (You can bid this way through TreasuryDirect, or a bank, dealer or broker.)

2. If you make a competitive bid, you indicate the bond yield you will accept, with three possible results:

• If it is less than or matches the prevailing high yield, your bid could be accepted for the full amount.
• If it is equal to the prevailing high yield, your bid could be accepted for less than the full amount.
• If it is greater than the prevailing high yield, your bid could be rejected outright.

Note: You can bid this way through a bank, dealer or broker, but not through Treasury Direct. Also, after an auction, bonds may then be sold in what is known as the "secondary market.”

Tax considerations when buying a Treasury bond
In this regard, interest income from a bond, which you will receive semi-annually, is subject to federal income tax but exempt from all state and local income tax.

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