Common stock is easy to understand, but when it comes to fixed-income instruments, the variety of types and features can get confusing. These conservative investments are each appropriate for particular investment strategies. Treasury bills are short-term investments, maturing within one year. Savings bonds are designed for the average investor seeking safe investments for moderate amounts of money. Revenue bonds are municipal bonds that are backed by the revenue from projects they finance, and are appropriate for investors seeking income exempt from federal, state and local income tax.
The U.S. Treasury issues Treasury bills once a month in maturities of one month, three months, six months and one year. The Treasury also issues cash management bills that mature in a few days, depending on the cash management needs they are financing. All T-bills are sold at a discount to the face value and the interest paid is the difference between what you pay and the $1,000 face value you receive when the T-bill matures. For example, if you purchase a year-bill at an interest rate of 1.5 percent, the cost is $985 and you receive $1,000 at maturity, which includes your $15 interest payment. You don't pay state or local income tax on T-bill interest.
U.S. Savings Bond
Series I and EE savings bonds are issued by the U.S. Treasury with ultimate maturities of 30 years, but they can be cashed in after one year, with 3 months' interest penalty. Hold a savings bond for five years to cash it in without penalty. Monthly interest accrues and compounds semi-annually in your I or EE bond and is paid when you cash it in, minus any penalties. The minimum investment is $25 and the maximum is $10,000 invested within each 12-month period. While interest is taxable as income for Federal tax purposes, it is deferred until you cash in the bonds. Interest is not subject to state and local taxes. Series I savings bond interest is inflation-adjusted in March and September of each year, but not Series EE bonds, which can be exchanged for Series I bonds.
Revenue bonds are municipal bonds sold by states and municipalities to finance revenue-producing projects, such as sports stadiums, toll roads, bridges and so on. They come in varying maturities, ranging from notes under 10 years to bonds with maturities of 30 years or longer. Interest is paid semi-annually and is exempt from federal income tax. Interest is also exempt from state and local taxes if you live in the state and municipality. The revenue backing these bonds makes them relatively more conservative as investments, but pay attention to the credit rating when buying the bonds: They aren't as safe as U.S. Treasury securities.
Treasury bills and savings bonds are considered the safest investments because the U.S. government guarantees timely payment of interest and principal. The short-term nature of T-bills and Series EE savings bonds makes them relatively conservative investments. All U.S. Treasury securities may be purchased through the Treasury Direct website. Revenue bonds may be purchased through your broker.
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