Essential guide to investing in treasury securities - Quick start guide

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Essential Guide To Investing In Treasury Securities

You may have heard that investing in treasury securities is the baseline for investments that have no risk. These kinds of terms can often seem confusing to the novice investor, so in this article we will give you the lowdown on treasury security investing. You will need to know what treasury securities are and what kind of returns to expect before you invest your hard earned money.

The United States government needs to finance its debt and one way that it does this is by the Treasury Department issuing securities. Most of the time treasury securities get sold to those that bid the highest at auction which provides the government with the best return. But you will also find treasury securities available on the secondary market.

These treasury securities are one of the safest forms of investment and some experts consider them to be zero risk. The reason for this is that they have the stability factor of the U.S. government as their foundation, and the chances of the government collapsing are incredibly slim to none.  

How to make money Investing in Treasury Securities

The first thing that you need to know is what these securities are and how they work. Did you know that there are 4 different types of treasury security? Well there are and here is an overview of them all:

Treasury Bills

Also known as T-bills, these will mature in 12 months or less. These are your baseline investments considered risk free. T-bills will often have maturity periods of 182 days, 91 days or 28 days.

These T-bills are not interest paying. You will buy them at a discounted rate, and you will earn money when you sell them after their maturity date. Use an annualized return for calculating the return on investment of these securities. You have to take into consideration what you have paid for the treasury bill, what its value is when it matures and the maturity time.

Treasury Notes

Also known as T-notes, these will mature between 2 and 10 years. They work the same way as T-bills in that you purchase them at a discounted rate from their value at maturity. But there is a difference – every half year T-notes pay out 50% of their “coupon rate”. This will have investors paying over the odds for these treasury securities.

To demonstrate how this works let’s consider a ten year T-note that has a value of $10,000. It comes that has a coupon rate of 4.25%. As the holder of this t-note you will get $217.50 from the government every six months. After maturity you can redeem your T-note for $10,000.

The market will normally dictate the price of these bonds. You will be able to purchase T-notes below their face value at certain times and have to pay over face value at other times. Consider an example where you purchase a five year, $5,000 face value T-note with a coupon rate of 4.625% at a cost of $9,965.

You would receive half yearly payments of $231.25 and then when redeemed the T-note for $10,000 you will have made a total return of $2,347.17 which gives an annual investment return of 4.71%.

Treasury Bonds

Also known as T-bonds, they work the same way as T-notes do but are for periods of over 10 years and up to 30 years. Like the T-notes there are half yearly coupon payments and when the T-bonds mature you will get the face value amount back for them.

A lot of people buy these as gifts for younger people so that they will have a regular coupon payments income and the redemption bonus at maturity. They are also a popular acquisition with long term trusts. If you have a lot of money to invest then T-bonds are worthy of consideration.

Savings Bonds

You may already be familiar with savings bonds as a form of treasury security. After you purchase a savings bond interest will begin to accrue, but this is not payable to you until the bond is ready for redemption.

After 12 months it is possible to redeem a savings bond. The interest rates are quite low but they do compound. So it is best to hold onto your savings bonds for as long as you can to make the most interest. This is different to all of the other kinds of treasury securities.

   

 

 

 

 

 

 

 

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