Treasury Investments/Securities - Treasury Bills, Notes, Bonds, Savings Bonds, TIPS And STRIPS
February 26, 2009 by How Savings Bonds Work
Filed under About Bonds
Treasury investments, or securities, are bonds issued by the Department of Treasury. In basic concept, they are the many different forms of loans that the people of the U.S. give to the government. There are four types of treasury securities:
1. Treasury bills or T-bills: these are securities that have a length of maturity that is less than one year (13, 26 or 52 weeks). Therefore, they are offered in a discounted form. Instead of offering interest along with the repayment amount, purchasers are offered more money at the time of maturity than they paid for the bill to begin with.
2. Treasury notes: This kind of security has a longer maturity date of 2, 5, or ten years, and they are sold in $1,000 increments.
3. Treasury bonds: With a long maturity date of 10-30 years, these securities can be helpful for investors who need to build a long-term strategy. Treasury bonds in paper form can be converted to electronic form.
4. Savings bonds: These securities differ from others in that they are registered to one person only and therefore cannot be actively traded. Also, they are the most affordable kind of treasury investment, as investors can purchase them for as low as $25.
What are the not-so-popular kinds of treasury investments?
In addition to these kinds of treasury investments or securities, the government also sells Patriot bonds, and STRIPS (Separate Trading of Registered Interest and Principal Securities). These investments separate the interest and principal parts of the security; they have the structure of a T-bill and mature between 1-30 years after issuance.
They are also the stripped version of TIPS (Treasury Inflation-Protected Securities). As zero coupon bonds, they do not pay interest payments. I Bonds and TIPS complete the wide variety of Treasury Investments. These bonds are purported to keep up with inflation, with the interest rate or principal balance adjusting with the nation’s economy.
What are the advantages of investing in the treasury securities?
Except for savings bonds, each of these is traded extensively on the market and can be easily converted to cash. They are backed by the Federal government and are usually considered low or no-risk investments. The interest on these “loans” is not taxable on the local or state level.
These securities are registered. This simply means that when these are purchased, the name that these are registered to is the sole owner. So, if you lose them these can easily be replaced if misplaced.
How can somebody invest in savings bonds?
In the past savings bonds were issued on paper. Since October 2002, the US treasury went high-tech and started to offer an online service TreasuryDirect. So, these purchases can be made online at your convenience.
Thanks to Mike Singh for contributing this article to our Bonds blog:
1. Treasury bills or T-bills: these are securities that have a length of maturity that is less than one year (13, 26 or 52 weeks). Therefore, they are offered in a discounted form. Instead of offering interest along with the repayment amount, purchasers are offered more money at the time of maturity than they paid for the bill to begin with.
2. Treasury notes: This kind of security has a longer maturity date of 2, 5, or ten years, and they are sold in $1,000 increments.
3. Treasury bonds: With a long maturity date of 10-30 years, these securities can be helpful for investors who need to build a long-term strategy. Treasury bonds in paper form can be converted to electronic form.
4. Savings bonds: These securities differ from others in that they are registered to one person only and therefore cannot be actively traded. Also, they are the most affordable kind of treasury investment, as investors can purchase them for as low as $25.
What are the not-so-popular kinds of treasury investments?
In addition to these kinds of treasury investments or securities, the government also sells Patriot bonds, and STRIPS (Separate Trading of Registered Interest and Principal Securities). These investments separate the interest and principal parts of the security; they have the structure of a T-bill and mature between 1-30 years after issuance.
They are also the stripped version of TIPS (Treasury Inflation-Protected Securities). As zero coupon bonds, they do not pay interest payments. I Bonds and TIPS complete the wide variety of Treasury Investments. These bonds are purported to keep up with inflation, with the interest rate or principal balance adjusting with the nation’s economy.
What are the advantages of investing in the treasury securities?
Except for savings bonds, each of these is traded extensively on the market and can be easily converted to cash. They are backed by the Federal government and are usually considered low or no-risk investments. The interest on these “loans” is not taxable on the local or state level.
These securities are registered. This simply means that when these are purchased, the name that these are registered to is the sole owner. So, if you lose them these can easily be replaced if misplaced.
How can somebody invest in savings bonds?
In the past savings bonds were issued on paper. Since October 2002, the US treasury went high-tech and started to offer an online service TreasuryDirect. So, these purchases can be made online at your convenience.
Thanks to Mike Singh for contributing this article to our Bonds blog:
On http://www.bond-trading.org/ you will find articles on tax exempt bond funds and canadian savings bonds.
Bond Fundamentals - Monetary Policy and Fiscal Policy
February 15, 2009 by How Savings Bonds Work
Filed under About Bonds
It’s the Federal Reserve Bank that influences the money supply. Three tools are used to implement monetary policy:
1. Open Market Operations
2. Discount Rates
3. Reserve Requirements
Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.
When the economy is growing too slowly and the inflation rate is low the Fed will buy government securities, such as Treasury bills and notes. This increases bank reserves, which increases the money supply and causes short-term interest rates to decrease. Reduced rates induce consumers and businesses to borrow. Consumers will borrow money for items such as automobiles or home loans. Businesses borrow to build their inventories or finance a new factory. As a result, economic growth will accelerate.
The Fed will also leave rates unchanged if the economy is growing at a moderate pace with low inflation or if they feel the economy will slow down by itself. They will even take a wait-and-see approach with regard to how slowly the economy is growing and the rate of inflation, before determining monetary policy.
The bond market plays close attention to the activities of the Federal Reserve, which is why it’s important for us as well.
The Federal Reserve has three goals:
1. Moderate economic growth (not too fast, not too slow)
2. Low unemployment
3. Low inflation
How does the Fed determine whether they are reaching these goals? They watch the same economic indicators as we do. In other words, they monitor the reports that are released by the Labor Department, the segments of our economy.
For instance, the Gross Domestic Product (GDP) consists of four major components: (1) consumption; (2) investment; (3) government; (4) exports. Most of the key economic indicators fall into one of the above categories. For example:
- Retail sales would fall under consumption.
- Business inventories and housing starts would fall under investment.
- Construction Spending would fall under government.
- Trade would fall under exports.
If the key economic indicators continue to come in strong, the GDP will increase. If the indicators come in weak, it will decrease. In other words, Gross Domestic Product measures economic growth.
Learn more about the Bond Market, sign up for Paul Judd’s Free BondLessons, click here.
Thanks to Paul Judd for contributing this article to our Bonds blog:
1. Open Market Operations
2. Discount Rates
3. Reserve Requirements
Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.
When the economy is growing too slowly and the inflation rate is low the Fed will buy government securities, such as Treasury bills and notes. This increases bank reserves, which increases the money supply and causes short-term interest rates to decrease. Reduced rates induce consumers and businesses to borrow. Consumers will borrow money for items such as automobiles or home loans. Businesses borrow to build their inventories or finance a new factory. As a result, economic growth will accelerate.
The Fed will also leave rates unchanged if the economy is growing at a moderate pace with low inflation or if they feel the economy will slow down by itself. They will even take a wait-and-see approach with regard to how slowly the economy is growing and the rate of inflation, before determining monetary policy.
The bond market plays close attention to the activities of the Federal Reserve, which is why it’s important for us as well.
The Federal Reserve has three goals:
1. Moderate economic growth (not too fast, not too slow)
2. Low unemployment
3. Low inflation
How does the Fed determine whether they are reaching these goals? They watch the same economic indicators as we do. In other words, they monitor the reports that are released by the Labor Department, the segments of our economy.
For instance, the Gross Domestic Product (GDP) consists of four major components: (1) consumption; (2) investment; (3) government; (4) exports. Most of the key economic indicators fall into one of the above categories. For example:
- Retail sales would fall under consumption.
- Business inventories and housing starts would fall under investment.
- Construction Spending would fall under government.
- Trade would fall under exports.
If the key economic indicators continue to come in strong, the GDP will increase. If the indicators come in weak, it will decrease. In other words, Gross Domestic Product measures economic growth.
Learn more about the Bond Market, sign up for Paul Judd’s Free BondLessons, click here.
Thanks to Paul Judd for contributing this article to our Bonds blog:
I highly recommend that you sign up for my Bond Hotline so you can get an idea of the trading methodology which is based on my Treasury Bond Model/Asset Allocation Tables. There are one to two trades per week. My Bond Hotline is updated five nights a week. In fact, the Bond Hotline is an education in itself. I cover current events that will be affecting bond prices. Call my office at 1-800-866-6443 or sign up by email to paul@bondlessons.com.My commitment as a teacher and mentor is to the person who has made up his or her mind to set a goal, which is to focus only on bonds. My creed includes passing along my years of knowledge and experience, as well as being easily accessible when you have questions or concerns. Visit www.bondlessons.com
