What is a Treasury Bond?

It is a marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

Treasury bonds are issued with a minimum denomination of $1,000. The bonds are initially sold through auction in which the maximum purchase amount is $5 million if the bid is non-competitive or 35% of the offering if the bid is competitive.

A competitive bid states the rate that the bidder is willing to accept; it will be accepted depending on how it compares to the set rate of the bond. A non-competitive bid ensures that the bidder will get the bond but he or she will have to accept the set rate. After the auction, the bonds can be sold in the secondary market.

The government sells Treasury bonds by auction in the primary market, but they can also be purchased through a broker in the secondary market. A broker will charge a fee for such a transaction, but the government charges no fee to participate in auctions. Treasury bonds are marketable securities, meaning that they can be traded after the initial purchase. Additionally, they are highly liquid because there is an active secondary market for them. Prices on the secondary market and at auction are determined by interest rates.

Treasury bonds issued today are not callable, so they will continue to accrue interest until the maturity date. One possible downside to Treasury bonds is that if interest rates increase during the term of the bond, the money invested will be earning less interest than it could earn elsewhere.

Accordingly, the resale value of the bond will decrease as well. Rising inflation can also eat into the interest earned on Treasury bonds. Because there is almost no risk of default by the government, the return on Treasury bonds is relatively low, and a high inflation rate can erase most of the gains by reducing the value of the principal and interest payments.