U.S. government debt is issued to raise money to run the government. In the United States, the federal government is the largest issuer of debt, and the market for U.S. government debt is the largest and most active in the world. Treasury securities are popular due to their low credit risk, as well as interest that is not taxed at the state level.

There are three main types of U.S. government securities:

1. Treasury Bills

  • These are short-term securities and are issued with three-month, six-month and nine-month maturities.
  • Three-month Treasury bills are considered cash equivalents.
  • Treasury bills are issued at a discount from par, and they mature at par.

2. Treasury Notes

  • These are intermediate-term securities and are issued with one- to 10-year maturities.
  • They are sold at par and pay semiannual interest.
  • Treasury notes are quoted as a percentage of par value in 32nds.
  • For instance, a price of 98:16 means that the price of the note or bond will be 98.5 percent of par (that is, 98 and 16/32).

3. Treasury Bonds

  • These are long-term securities that were issued with maturities of 30 years.
  • They have the same characteristics as Treasury notes but are usually callable five years prior to maturity.
  • The government stopped issuing 30-year Treasury bonds in February 2002, but resumed in February 2006.

In addition, there are several other debt instruments either issued or backed by the U.S. Government.

Treasury STRIPS

  • An acronym for Separate Trading of Registered Interest and Principal of Securities
  • These are zero-coupon bonds sold directly to the public.
  • STRIPS are sold only with maturities of 10 years or more.

TIPS

  • An acronym for Treasury Inflation Protection Securities
  • These newer securities are unique, since they offer investors protection against purchasing power risk.
  • TIPS have a fixed interest rate for the life of the bond, but the principal amount is adjusted every six months based on the rate of inflation.
  • Note that these adjustments will not cause the bondholder to receive less than par at maturity, even if the principal was decreased due to such adjustments.


Mortgage-Backed Securities - MBS

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