Treasury Bonds - a Good Way To Save

If you're familiar with how savings bonds work, you know that a $50 bond is purchased for around $29. At the end of 10 years, you may redeem the bond for the face value of $50 because the interest paid on them makes up the difference. For those not familiar with them, Treasury bonds are a bond that is issued by the Federal government that usually has an maturation period attached that is for 30 years. There is an interest rate paid on them that comes up every six months, until the maturation time is reached, and then the face amount on the bond is paid to the bearer of the bond.

Unlike a savings bond, the price and interest rate yield of a Treasury bond are determined at an auction. The price paid for the bond might be greater than, less than, or equal to the face value printed on the bond. To buy a bond there are two types of bids that are accepted. The first kind is known as a noncompetitive bid, and with it you agree to accept the interest rate that is determined at its auction. This kind of bid makes sure that you are guaranteed to receive the bond you want, and in the total amount that you want. Currently, they are sold in increments of $100, and the minimum amount you can purchase is $100. After you have bought it, you can hold a Treasury bond until it matures, or you can sell it at any time before it matures.

The second kind of bid is known as a competitive bid, and to make this bid, you specify the yield from it that you are willing to accept. Your bid might be accepted for the full amount you want if your bid is equal to or less than the yield that is determined at auction, or it might be accepted for less than the full amount you want if your bid is equal to the high yield. Lastly, your bid might be rejected if the yield you specify is higher than the yield that is set at the auction.

If you want to place a noncompetitive bid, you can use a bank, broker, dealer or the service known as TreasuryDirect. If you want to place a competitive bid, you absolutely have to use a bank, broker, or dealer. Currently, bonds exist in one of two formats. There are paper certificates (this kind is the older form of bonds) or a form known as electronic entries in accounts. Bonds today are issued only in electronic form, not in the paper format.

The reason that long-term bonds are a good hedge for the future is that experts have indicated that long-term bond rates have exceeded the rate of inflation by an average of at least 2.4 percentage points each year. This means that at whatever extent you believe inflation will go up over the next three decades, the 30-year Treasury bond's yield should be even higher than that.

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