# How Is the Interest Rate on a Treasury Bond Determined?

The yield on U.S. Treasury securities, including Treasury bonds (T-bonds), depends on three factors: the face value of the security, how much the security was purchased for, and how long until the security reaches its maturity date.

Many external factors influence Treasury prices and yields, including the monetary policy of the Federal Reserve and the perceived health of the economy.

### Key Takeaways

• Treasuries are bonds issued by the federal government.
• A Treasury bond pays a "coupon rate." This is the percentage return paid to the investor periodically until its maturity date.
• Treasury bonds also are traded in the market. As fewer payments remain to be made, its yield falls, as does its value in the market.
• At the same time, market forces affect the value of T-bonds. When investors crave safety, they buy T-bonds.

## Interest Rate Vs. Coupon Rate Vs. Current Yield

T-bonds don't carry an interest rate as a certificate of deposit (CDs) would. Instead, a set percent of the face value of the bond is paid out at periodic intervals. This is known as the coupon rate.﻿﻿

For example, a \$10,000 T-bond with a 5% coupon will pay out \$500 annually, regardless of what price the bond is trading for in the market.

This is where current yields become relevant. Debt instruments don't always trade at face value. If an investor purchases that same \$10,000 bond for \$9,500, then the rate of investment return isn't 5% – it's actually 5.26%. This is calculated by the annual coupon payment (\$500) divided by the purchase price (\$9,500).

## Factors Affecting Treasury Yields

As the previous example demonstrates, the yield on a bond rises when the purchase price of the bond drops. T-bond purchase prices are determined by the supply and demand for Treasury debt. Prices are bid up when there are more buyers in the market.

Treasury debt is considered an extremely safe investment. Since the government has its own printing press in the Federal Reserve, there is virtually no chance of the Treasury department defaulting on its bond obligations.

This means that Treasury rates are very important. The lower than interest rates are on Treasuries, the cheaper it is for the federal government to borrow (and vice-versa). This means that in a low interest rate environment, the government can fund more projects and expenditures on more favorable terms.

Treasuries are also considered the safest of all investments in the U.S., since the government has never defaulted on its own debt. This makes them a proxy for the so-called risk-free interest rate. When times are uncertain, investors tend to take money out of more volatile assets, such as stocks, and put them into safer investments like Treasuries. That increase in demand can force T-bond prices up and pushes T-bond yields down.

T-bonds offer comparatively modest returns, but they are extremely safe investments.

## What Is a T-Bond?

A Treasury bond (T-bond) is a long-term U.S. government debt security. The federal government issues the bonds to raise money to cover its expenses.

## How Large Is the National Debt?

As of August 2022, the national debt stood at about \$24 trillion, a record high.

## How Do You Calculate the National Debt?

The U.S. debt is equal to the total dollar amount of outstanding T-bonds and T-bills.T-bills are short-term debt instruments, while T-bonds have longer maturities.

Article Sources
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2. TreasuryDirect. "Treasury Bonds: Rates & Terms."

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4. U.S. Department of the Treasury, FiscalData. "Debt to the Penny."

5. Congressional Budget Office. "Federal Debt: A Primer."