Government Securities - Types Of Government Securities

Series EE Bonds:

The series EE bonds are commonly known as savings bonds. They are purchased directly from the US government at a discount from their face value, typically 50%.  The Series EE bonds pay no semi-annual interest and may be redeemed at maturity for the face value.  The investor’s interest is earned through the bonds appreciation towards the face value. The interest earned through this appreciation is taxable by the federal government and the investor may pay taxes on this money each year or may wait until the bond matures. The investor may also elect to roll the matured Series EE bonds into Series HH bonds and continue to defer Taxes.

Series HH Bonds

A Series HH bond may only be purchased by trading in matured Series EE bonds. They may not be purchased for cash. Series HH bonds, unlike EE’s, pay semi-annual interest and are available in denominations of $500 to $10,000 and mature in 10 years. Series HH bonds may be redeemed at their face value at anytime

Treasury Bills, Notes, and Bonds

The most widely held US Government securities are Treasury bills, notes, and bonds. These direct obligations of the US government range from one month up to 30 years.

Purchasing Treasury Bills

Treasury bills range in maturity from 4 to 52 weeks and are auctioned off by the Treasury Department through a weekly competitive auction. Large banks and broker dealers, known as primary dealers, submit competitive bids or tenders for the bills being sold. The Treasury awards the bills to the bidders who submitted the highest bid and work their way down to lower bids until all of the bills are sold. Treasury bills pay no semi-annual interest and are issued at a discount from par. The bill appreciates up to par at maturity and the appreciation represents the investor’s interest. Because bills are priced at a discount from par, a higher dollar price represents a lower interest rate for the purchaser.

All noncompetitive tenders are filled before any competitive tenders are filled. A bidder who submits a noncompetitive tender agrees to accept the average of all the yields accepted by the Treasury and does not try to get the best yield. All competitive tenders are limited to a maximum amount of $500,000. All bids that are accepted and filled by the Treasury are settled in fed funds. Treasury bills range in denominations from $100 up to $1,000,000.

Take Note:  A quote for a Treasury bill has a bid that appears to be higher than the offer. But remember that the bills are quoted on a discounted yield basis. The higher bid actually represents a lower dollar price than the offer

Example:

Bid Ask
2.91 2.75

Treasury Notes

Treasury notes are the US Government’s intermediate term security and range in term from one year up to ten years. Treasury notes pay semi-annual interest and are auctioned off by the Treasury every four weeks. Treasury notes are issued in denominations ranging from $100 up to $1,000,000 and may be refunded by the government. If a Treasury note is refunded, the government will offer the investor a new Treasury note with a new interest rate and maturity. The investor may always elect to receive their principal payment instead of accepting the new note.

Treasury Bonds

Treasury bonds are the US Government’s long-term bonds. Maturities on Treasury bonds range from 10 years up to 30 years. Treasury bonds, like Treasury notes, pay semi-annual interest and are issued in denominations raging from $100 up to $1,000,000. Some Treasury bonds may be called in at par by the Treasury. If the Treasury department calls in a bond issue they must give holders 4 months notice before calling the bonds.

Treasury Bond and Note Pricing

Treasury notes and bonds are quoted as a percentage of par. However, unlike their corporate counterparts, Treasury notes and bonds are quoted as a percentage of par down to 32nds of 1%. For example, a Treasury bond quote of 92.02 translates into:

92 2/32% x $1,000 = $920.625

A quote of 98.04 translates into:

98.125% x $1,000 = $981.25

It is important to remember that the number after the decimal points represents 32nds of a percent.

Treasury Security Type of Interest Term Priced
Bill None

4, 13, 26, 52 weeks

1, 3,6,12 months

At a discount from par
Note Semi annual 1-10 years As a percentage of par to 32nds of 1 %
Bond Semi annual 10-30 years As a percentage of par to 32nds of 1 %

The minimum denomination for purchasing a Treasury bill, note, or bond from TreasuryDirect.gov is $100. All quotes in the secondary market are based on $1,000 par value.

Treasury Strips

The term Treasury “STRIPS” actually stands for: Separate Trading of Registered Interest and Principal Securities. The Treasury securities are separated into two parts: a principal payment and semiannual interest payments. A Treasury strip is a zero coupon bond that is backed by US government securities. An investor may purchase the principal payment component of $1,000 due on a future date at a discount. An investor seeking some current income may wish to purchase the semi-annual coupon payments due over the term of the Treasury securities.

Treasury Receipts

Treasury receipts are similar to Treasury STRIPS, except that broker dealers and banks create them. Broker dealers and banks will purchase large amounts of Treasury securities, place them in a trust and sell off the interest and principal payments to different investors.

Treasury Inflation Protected Securities / TIPS

Treasury inflation protected securities, or TIPS, offer the investor protection from inflation. The TIPS are sold with a fixed interest rate and their principal is adjusted semiannually to reflect changes in the consumer price index. During times of inflation the investor’s interest payments will rise, while during times of falling prices, the principal amount of the bond will be adjusted down and the investor will receive a lower interest payment.

 

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