Investment Securities - U.S. Government Securities
The United States government is the largest issuer of debt securities, and its bonds are considered the safest fixed-income investments available to your customer. There are two primary types of U.S. government debt securities: issues with direct government backing, as is the case with Treasury and federal agency issues, and issues with"moral" backing or guarantee, as is the case with government-sponsored enterprise (GSE) issues.
Examples of Treasury issues include Treasury bills (T-bills), Treasury notes (T-notes)and Treasury bonds (T-bonds). GSE issues include securities issued by Fannie Mae, Freddie Mac, Federal Land Banks, Federal Home Loan Banksand other agencies. The most common federal agency-issued security is the Government National Mortgage Association (GNMA) security, better known as a Ginnie Mae.
Treasuries are among the most liquid of investments. The government sells securities directly to investors through the primary market when they are first offered. In addition, there is a very large secondary market for Treasuries. Although Treasuries have almost no credit risk, their prices may fluctuate with changes in interest rates. All Treasuries are sold in book-entry form, which means the investor never receives the paper security. Rather, the Federal Reserve Bank enters the name of the owner in its records.
- Treasury Bills: Treasury bills are direct, short-term debt obligations of the U.S. government. They are issued every week using a competitive bidding process in maturities of one month, three months and six months. Once per quarter, the U.S. government issues Treasury bills with one-year maturities. T-bills have minimal interest-rate risk, since they have very short-term maturities. Treasury bills are issued at a discount from their par value. That is, they do not pay interest. They are sold with a minimum denomination of $100 through TreasuryDirect.gov and multiples of $100 thereafter. Secondary market quotes are based on $1,000 par value
- Treasury Notes: Treasury notes are direct debt obligations of the U.S. Treasury that pay semiannual interest as a percentage of the stated par value, have intermediate-term maturities (1-10 years) and mature at par value. Treasury notes are sold with a minimum denomination of $100 through TreasuryDirect.gov and multiples of $100 thereafter. Secondary market quotes are based on $1,000 par value. Treasury notes are quoted as a percentage of par based on 32nds of 1 percent
- Treasury Bonds: Treasury bonds are the direct debt obligations of the U.S. Treasury that pay semiannual interest as a percentage of par value and mature at par, like Treasury notes. They differ from T-notes in the length of their maturities, which are generally 10 to 30 years. They are also usually callable at par beginning 25 years after issue.They are sold with a minimum denomination of $100 through TreasuryDirect.gov and multiples of $100 thereafter. Secondary market quotes are based on $1,000 par value.Treasury bonds are quoted as a percentage of par based on 32nds of 1 percent
While T-bills are also referred to as discount securities, T-notes and T-bonds are known as interest-bearing securities. The interest earned on all Treasury securities is subject to federal taxation but exempt from state and local taxes. An owner of a T-bill pays federal tax on interest in the year in which the T-bill matures, while the T-note and T-bond owner pays federal tax on the interest in the year in which it is paid.
Exam Tips and Tricks
You will probably be asked to know which Treasury issue does not pay interest. (Well, which is it?) This question is meant to test your knowledge of the maturity terms for each type of Treasury security. Also note that both T-notes and T-bonds are sold in minimum denominations of $1,000 and in multiples of $1,000 thereafter.