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Treasury bonds, or T-bonds, are marketable securities issued by the US government, and are available in increments of $100. Bonds have a maturity range of ten to 30 years, with 30 being the most common.   Interest is paid every six months, and is tax free at the state level, but taxable at the federal level.

Treasury bonds can be purchased directly from the US Treasury or though participating banks and brokers.  The bonds are sold in an auction that sets the price and yield of the bond. There are two types of bids for purchasing a treasury bond: a non-competitive bid or a competitive bid.

With a non-competitive bid, the bidder agrees to accept the rate determined in the auction.  This guarantees that the bidder will be able to purchase a bond, but he must pay the full amount.

In a competitive bid, the bidder specifies an acceptable yield.  One of three options then applies: 

If the bid is equal to or less than the yield determined at auction, the bid is accepted at the full price. 

If the bid is equal to the high bid at auction, the bid is accepted at less than the full amount bid. 

If the yield requested is higher than the yield set at auction, the bid is rejected.

In any one auction, the maximum a bidder can purchase depends on the type of bid.  If it is a non-competitive bid, the maximum is $5,000,000 per security type, term and auction.  For competitive bids, the maximum is 35% of the offering amount. Further restrictions may apply, including a household limit, so check with the Treasury Department before making large T-bond purchases.

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