The United States Department of the Treasury provides one of the largest and safest ready markets for debt securities in the world. Both institutions and individual investors can purchase U.S. government debt securities, such as Treasury bonds, through the TreasuryDirect.gov website. Treasury bonds offer investors a number of benefits, including the safety of being backed by the full faith and credit of the U.S. government. They also come with some built-in tax advantages.
U.S. Treasury bonds are sold in increments of $100 with a $100 minimum purchase. Technically, a Treasury bond is a U.S. government debt security with a maturity of at least 10 years, but as of 2012 all newly-issued Treasury bonds had 30-year maturities. Treasury bonds pay a stated fixed rate of interest every six months and can be redeemed for their face value upon maturity. There is an active secondary market for government securities, allowing investors to buy and sell previously issued Treasury bonds.
The interest paid by U.S. Treasury bonds is exempt from income taxation at the state and local level, but is fully taxable on your federal income tax return. The Department of the Treasury will provide you with a Form 1099-INT detailing the amount of interest you were paid on your Treasury securities that you can use when you file your federal tax return.
The price of bonds in the secondary market is heavily influence by prevailing interest rates. If current interest rates rise, the market price of bonds tends to fall. If interest rates decrease, the market price of bonds tends to rise. The reason is obvious: Why would you pay $1,000 for a Treasury bond paying 2 percent interest in the secondary market when you can buy a new-issue $1,000 Treasury bond paying 2.5 percent interest? If you sell a Treasury bond in the secondary market for more than you paid for it, you will have a taxable capital gain.
The government's TreasuryDirect program will automatically withhold up to 50 percent of your interest payments for income tax purposes if you so desire. You can designate the percentage that you want withheld. U.S. government securities, including Treasury bonds, are considered to be one of the safest of all investments. Both the principal and interest on these bonds is guaranteed if held to maturity, but your investment is not protected against market risks. You can lose money if you sell your Treasury bond prior to maturity.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.