Know your Options when Buying Government Bonds

Investing in the government is a solid choice for those who are more risk averse. There are many benefits to buying government bonds such as a very low chance of default and some legal protection. Here are some different treasury offerings available to you.

Treasury Bills or T-bills

Treasury bills are short-term government securities with maturities ranging from a few days to 52 weeks. Bills are sold at a discount from their face value determined at auction. The minimum purchase amount is $100, and thereafter can be bought in $100 increments. You are able to sell these bills before maturity, but interest will only be paid at the maturity date.

Treasury Notes or T-Notes

Treasury notes issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months. The interest paid is according to the notes’ yield which is determined at auction. The price of the note may be less than, equal to, or greater than face value.

Treasury Bonds

Treasury bonds pay interest every six months and mature in 30 years. The price and yield are determined at auction. As with T-notes the price may be less than, equal to, or greater than face value. Treasury bonds are no longer issued in paper form.

Treasury Inflation-Protected Securities (TIPS)

TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. TIPS pay interest every six months and are issued with maturities of 5, 10, and 30 years. The interest rates on TIPS are fixed. However, because the principal changes with the CPI, your interest payment will increase with inflation and decrease with deflation in the economy. At maturity you will be paid the original principal or the adjusted principal, whichever is greater.

Savings Bonds or I-bonds

I Savings Bonds are a low-risk savings product that earn interest while protecting you from inflation. They are sold at face value and are inflation-protected. You can purchase up to $5000 worth of these bonds a year. If you redeem an I-Bond in the first 5-year period you forfeit the 3 most recent interest payments. Denominations and increments are different in electronic and paper I-bonds.

EE/E Savings Bonds

EE/E Savings Bonds are low-risk savings product that pays interest based on current market rates for up to 30 years. Many use these bonds for education and retirement savings. Bonds issued today earn a fixed rate of return. Electronic EE Savings Bonds are sold at face value in TreasuryDirect. Paper EE Savings Bonds are sold at 1/2 face value and are only worth face value at maturity. The U.S. treasury is beginning to phase out paper EE/E Savings Bonds

Buying the Treasuries:

To buy government securities you may use the electronic TreasuryDirect online, the traditional Legacy Treasury Direct, a bank, broker, or dealer. TreasuryDirect accounts are password protected and available 24-7. There are no maintenance fees for this service. Paper securities are not available through TreasuryDirect accounts.

To open an account with Legacy Treasury Direct you must complete and mail in a “New Account Request” form and the “Treasury Marketable Securities Tender” form. These documents must be mailed to your local Treasury Retail Site. The Legacy Treasury Direct service doesn’t offer the 4-week Treasury bill, 7-year Treasury note, 30-year TIPS, or 30-year Treasury bond. You will need a bank account to open this account. If your account holds more than 100,000 an annual fee of $100 will be charged.

How To Buy Municipal Bonds Online

It wasn’t so long ago that buying municipal bonds was a far greater mystery than that of buying shares of stock in a company. We knew how find stockbrokers (or they knew how to find us). We could view the stock charts in the daily paper. But even though we all lived in towns, muncipalities, cities and states that raised funds by selling bonds most of us never bought a municipal bond or “muni”. Now, access to information, markets and exchanges via the internet has changed that, making it possible for you and I to buy government bonds onine.

A variety of brokerage houses, some that specialize in online bond sales – such as FMSBonds – and others that offer a vast array of investing options, including buying bonds online – such as Fidelity – make it possible to search for and select a wide range of government “bond offerings” from the comfort of home.

FMS’s online bond offerings include, for example:

  • Taxable Muncipal Bonds
  • Non-AMT Bonds (that are not subject to the “alternative minimum tax”
  • Zero Coupon Bonds
  • Insured Bonds

Typically, brokerages selling bonds will list their online bond offerings by showing the following:

  • Government agency that issued the bonds
  • Moody’s rating
  • S&P’s rating
  • Quantity available
  • A general description
  • An indication if it’s a “coupon” bond
  • Maturity
  • YTM or “Yield to Maturity”
  • WCY or “Worst Case Yield”
  • and last, but not least, the bond’s Price

Once you have performed your due diligence in selecting a government bond worthy of your investment of dollars it then is a simple matter of setting up an account by providing the necessary personal information, and money, of course, and you can begin your venture into municipal bond investing.