What are Treasury Bonds (T-Bonds)?

//What are Treasury Bonds (T-Bonds)?
What are Treasury Bonds (T-Bonds)? 2017-10-10T16:58:21+00:00

Definition: US Treasury Bonds, also called T-bonds, are long-term debt instruments issued and backed by the United States government to finance its operations. In other words, they are long-term loans with a maturity date of more than one year issued by the US government to the public in an effort to fund its ongoing activities.

What Does Treasury Bonds Mean?

What is the definition of treasury bond? T-bonds are one of the many debt instruments issued by the US Government to fund long-term projects and operations. These instruments are typically issued in $1,000 denominations with a semiannual interest payment and different maturity dates ranging from 10 to 30 years.

T bonds are available directly from the government or participating banks and brokers. They are initially sold through auctions where the price and yield are set. Depending on the bidding process, different rules apply.

Non-competitive bids have a maximum bid limit of $5 million and require that the bidder accept the terms established in the auction. In other words, these bidders are simply giving the government the price they are asking for.

Competitive bids, on the other hand, have a maximum bid limit of 35 percent of the offering amount and allow the bidders to stipulate their own yield amount. The three circumstances apply if a competitive bid is placed.

  1. If the bid is equal to or less than the yield, the bid is accepted at the full price.
  2. If the bid is equal to the high bid, the bid is accepted at less than the full bid.
  3. If the yield requested is greater than the yield already set, the bid is rejected.

Since T-bonds are fully backed by the US Government, they are considered to be zero risk investments making them attractive to many investors. As an added bonus to investors, T-bonds are tax-exempt on a state and local municipal level.

Let’s look at an example.

Example

Mr. Morgan is a construction worker; he’s 30 years old and lives in Seattle with his wife and 2 kids. One of the kids is 5-years-old and the other one is 6-years-old. He has been saving money in a savings account to send his kids to college up until now, but he wants to start investing this money in something safe that pays interest instead of leaving it in his savings account.

Thus, he uses the money in his savings account to purchase 10 year T-bonds. These bonds mature right before his kids will be old enough to go to college. This way Morgan will be able to college interest payments for the next ten years without having to worry about the safety of his investments. When the kids are ready to go to college, the bonds will be matured and Morgan will be able to cash them in for their face amounts.

Summary Definition

Define Treasury Bonds: T-Bond means a long-term debt security issued by the U.S. government to fund public projects.