FOOL'S SCHOOL DAILY Q&A

The Basics of Treasury Securities

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By Robert Brokamp (TMF Bro)
May 13, 2002

Q. Can you explain the different types of Treasury securities?

A. Treasury securities are forms debt instruments issued by the U.S. government. When investors purchase Treasuries, they're essentially lending Uncle Sam some money. In return, Uncle Sam promises to pay the money back, with some interest along the way. There are many types of Treasury securities, but the most common are Treasury bonds, notes, and bills.

Treasury bonds come with a variety of maturity periods, all of which are longer than 10 years. The "long bond" is the U.S. government's 30-year bond (which is no longer being offered starting this year, but existing 30-year bonds can be bought from other investors). Its yield is the one often cited by the media when interest rates are being discussed. Treasury notes are shorter-term investments, maturing in two, five, or 10 years.

Treasury bills (or T-bills) mature in 13, 26, or 52 weeks. Besides their shorter maturities, Treasury bills differ from Treasury notes and bonds in another important feature: T-bills are offered as a discount to their face value. What does that mean? Instead of receiving interest payments, T-bill investors receive more money back at maturity than they paid. For example, an investor might pay $9,750 for a $10,000 26-week T-bill. That $250 difference is considered the interest.

Other popular Treasury securities are I Bonds and Treasury Inflation-Protected Securities (TIPS), which are guaranteed to keep up with inflation -- but in different ways. With I Bonds, the interest rate is adjusted to keep up with the rising cost of goods and services, whereas with TIPS, the principal is adjusted.

There are even more U.S. government investments to learn about, including U.S. savings bonds, Patriot bonds, and the provocatively named STRIPS. Regardless the security, though, all Treasuries have these two features in common: 1) the interest is not taxable on the state or local level, and 2) they're considered the safest investments in the world.

You can learn more about bonds in our Investing Basics area and our FAQ area. There's also a wealth of info at Treasurydirect.gov, where you can buy Treasury securities commission-free.

If you have any questions, thoughts or opinions on this topic, share them with others on our discussion board for Ask the Fool.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.